Zahrat Al Waha For Trading (TADAWUL:3007) Could Be Struggling To Allocate Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Zahrat Al Waha For Trading (TADAWUL:3007), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.14 = ر.س49m ÷ (ر.س616m - ر.س267m) (Based on the trailing twelve months to March 2024).

Therefore, Zahrat Al Waha For Trading has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 15% generated by the Packaging industry.

View our latest analysis for Zahrat Al Waha For Trading

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zahrat Al Waha For Trading's ROCE against it's prior returns. If you're interested in investigating Zahrat Al Waha For Trading's past further, check out this free graph covering Zahrat Al Waha For Trading's past earnings, revenue and cash flow.

So How Is Zahrat Al Waha For Trading's ROCE Trending?

We are a bit worried about the trend of returns on capital at Zahrat Al Waha For Trading. About five years ago, returns on capital were 19%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Zahrat Al Waha For Trading becoming one if things continue as they have.

Another thing to note, Zahrat Al Waha For Trading has a high ratio of current liabilities to total assets of 43%. 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.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 35% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Zahrat Al Waha For Trading does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those make us uncomfortable...

While Zahrat Al Waha For Trading isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com