To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Zamil Industrial Investment (TADAWUL:2240), we weren't too hopeful.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Zamil Industrial Investment:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.005 = ر.س8.3m ÷ (ر.س5.6b - ر.س4.0b) (Based on the trailing twelve months to June 2021).
Thus, Zamil Industrial Investment has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 11%.
Above you can see how the current ROCE for Zamil Industrial Investment compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Zamil Industrial Investment.
The Trend Of ROCE
In terms of Zamil Industrial Investment's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 0.5% we see today. In addition to that, Zamil Industrial Investment is now employing 41% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.
On a side note, Zamil Industrial Investment's current liabilities have increased over the last five years to 70% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.
What We Can Learn From Zamil Industrial Investment's ROCE
In summary, it's unfortunate that Zamil Industrial Investment is shrinking its capital base and also generating lower returns. However the stock has delivered a 79% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
One more thing: We've identified 3 warning signs with Zamil Industrial Investment (at least 2 which are concerning) , and understanding these would certainly be useful.
While Zamil Industrial Investment 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.
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