Returns On Capital At Zahrat Al Waha For Trading (TADAWUL:3007) Paint An Interesting Picture

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Looking at Zahrat Al Waha For Trading (TADAWUL:3007), it does have a high ROCE right now, but lets see how returns are trending.

What is Return On Capital Employed (ROCE)?

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 Zahrat Al Waha For Trading:

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

0.22 = ر.س64m ÷ (ر.س502m - ر.س210m) (Based on the trailing twelve months to September 2020).

So, Zahrat Al Waha For Trading has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.

See our latest analysis for Zahrat Al Waha For Trading

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 want to delve into the historical earnings, revenue and cash flow of Zahrat Al Waha For Trading, check out these free graphs here.

The Trend Of ROCE

On the surface, the trend of ROCE at Zahrat Al Waha For Trading doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 40% where it was five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Zahrat Al Waha For Trading's current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Zahrat Al Waha For Trading's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Zahrat Al Waha For Trading have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 96% return over the last three years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Zahrat Al Waha For Trading does have some risks though, and we've spotted 2 warning signs for Zahrat Al Waha For Trading that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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