Is This A Sign of Things To Come At Baazeem Trading (TADAWUL:4051)?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Baazeem Trading (TADAWUL:4051) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

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 Baazeem Trading:

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

0.17 = ر.س33m ÷ (ر.س241m - ر.س46m) (Based on the trailing twelve months to September 2020).

Therefore, Baazeem Trading has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Retail Distributors industry average of 5.4% it's much better.

Check out our latest analysis for Baazeem Trading

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'd like to look at how Baazeem Trading has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Baazeem Trading's ROCE Trend?

There is reason to be cautious about Baazeem Trading, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 23% that they were earning five years ago. 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. If these trends continue, we wouldn't expect Baazeem Trading to turn into a multi-bagger.

On a related note, Baazeem Trading has decreased its current liabilities to 19% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

What We Can Learn From Baazeem Trading's ROCE

In summary, it's unfortunate that Baazeem Trading is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 239%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Baazeem Trading (including 1 which is can't be ignored) .

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.

If you decide to trade Baazeem Trading, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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