Nama Chemicals (TADAWUL:2210) Is Doing The Right Things To Multiply Its Share Price

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Nama Chemicals' (TADAWUL:2210) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Nama Chemicals, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.018 = ر.س15m ÷ (ر.س1.2b - ر.س314m) (Based on the trailing twelve months to December 2021).

Therefore, Nama Chemicals has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 9.7%.

See our latest analysis for Nama Chemicals

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Nama Chemicals' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Nama Chemicals' ROCE Trending?

Shareholders will be relieved that Nama Chemicals has broken into profitability. The company now earns 1.8% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 27%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Nama Chemicals has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Nama Chemicals' ROCE

As discussed above, Nama Chemicals appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 109% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to know some of the risks facing Nama Chemicals we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Nama Chemicals may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.