Stock Analysis

Baazeem Trading's (TADAWUL:4051) Returns On Capital Not Reflecting Well On The Business

SASE:4051
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When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Baazeem Trading (TADAWUL:4051), we've spotted some signs that it could be struggling, so let's investigate.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Baazeem Trading:

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

0.13 = ر.س26m ÷ (ر.س255m - ر.س53m) (Based on the trailing twelve months to June 2022).

So, Baazeem Trading has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Retail Distributors industry average of 8.1% it's much better.

See our latest analysis for Baazeem Trading

roce
SASE:4051 Return on Capital Employed October 4th 2022

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

So How Is Baazeem Trading's ROCE Trending?

We are a bit worried about the trend of returns on capital at Baazeem Trading. About five years ago, returns on capital were 17%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Baazeem Trading becoming one if things continue as they have.

On a side note, Baazeem Trading has done well to pay down its current liabilities to 21% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, it's unfortunate that Baazeem Trading is generating lower returns from the same amount of capital. Since the stock has skyrocketed 279% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Baazeem Trading does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

While Baazeem 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.

Valuation is complex, but we're here to simplify it.

Discover if Baazeem Trading might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.