Stock Analysis

Investors Could Be Concerned With Abdullah Saad Mohammed Abo Moati Stationaries' (TADAWUL:4191) Returns On Capital

SASE:4191
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What financial metrics can indicate to us that a company is maturing or even 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. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Abdullah Saad Mohammed Abo Moati Stationaries (TADAWUL:4191), so let's see why.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Abdullah Saad Mohammed Abo Moati Stationaries:

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

0.054 = ر.س13m ÷ (ر.س332m - ر.س92m) (Based on the trailing twelve months to December 2020).

Thus, Abdullah Saad Mohammed Abo Moati Stationaries has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 10%.

View our latest analysis for Abdullah Saad Mohammed Abo Moati Stationaries

roce
SASE:4191 Return on Capital Employed May 28th 2021

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 Stationaries' 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 Stationaries, check out these free graphs here.

So How Is Abdullah Saad Mohammed Abo Moati Stationaries' ROCE Trending?

In terms of Abdullah Saad Mohammed Abo Moati Stationaries' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 12%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Stationaries becoming one if things continue as they have.

On a related note, Abdullah Saad Mohammed Abo Moati Stationaries has decreased its current liabilities to 28% 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. 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 Stationaries' 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 393% over the last three 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.

Like most companies, Abdullah Saad Mohammed Abo Moati Stationaries does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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