Returns On Capital At Al Kathiri Holding (TADAWUL:3008) Paint An Interesting Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Al Kathiri Holding (TADAWUL:3008), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on Al Kathiri Holding is:

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

0.081 = ر.س11m ÷ (ر.س166m - ر.س36m) (Based on the trailing twelve months to December 2020).

Therefore, Al Kathiri Holding has an ROCE of 8.1%. In absolute terms, that's a low return but it's around the Basic Materials industry average of 8.8%.

Check out our latest analysis for Al Kathiri Holding

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 Al Kathiri Holding, check out these free graphs here.

So How Is Al Kathiri Holding's ROCE Trending?

In terms of Al Kathiri Holding's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 42%, but since then they've fallen to 8.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Al Kathiri Holding has done well to pay down its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Al Kathiri Holding is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 646% to shareholders in the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Al Kathiri Holding does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While Al Kathiri Holding 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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