Stock Analysis

Here's What's Concerning About Abdullah Saad Mohammed Abo Moati for Bookstores' (TADAWUL:4191) Returns On Capital

SASE:4191
Source: Shutterstock

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Abdullah Saad Mohammed Abo Moati for Bookstores (TADAWUL:4191), the trends above didn't look too great.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Abdullah Saad Mohammed Abo Moati for Bookstores, this is the formula:

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

0.065 = ر.س16m ÷ (ر.س323m - ر.س73m) (Based on the trailing twelve months to December 2021).

Thus, Abdullah Saad Mohammed Abo Moati for Bookstores has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 10%.

See our latest analysis for Abdullah Saad Mohammed Abo Moati for Bookstores

roce
SASE:4191 Return on Capital Employed June 18th 2022

Historical performance is a great place to start when researching a stock so above you can see the gauge for Abdullah Saad Mohammed Abo Moati for Bookstores' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Abdullah Saad Mohammed Abo Moati for Bookstores, check out these free graphs here.

How Are Returns Trending?

There is reason to be cautious about Abdullah Saad Mohammed Abo Moati for Bookstores, given the returns are trending downwards. About five years ago, returns on capital were 9.1%, 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. 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 Abdullah Saad Mohammed Abo Moati for Bookstores becoming one if things continue as they have.

On a side note, Abdullah Saad Mohammed Abo Moati for Bookstores has done well to pay down its current liabilities to 23% 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 Abdullah Saad Mohammed Abo Moati for Bookstores' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these poor fundamentals, the stock has gained a huge 189% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about Abdullah Saad Mohammed Abo Moati for Bookstores, we've spotted 2 warning signs, and 1 of them is potentially serious.

While Abdullah Saad Mohammed Abo Moati for Bookstores 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 helping make it simple.

Find out whether Abdullah Saad Mohammed Abo Moati for Bookstores is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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

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.