Is Abdullah Saad Mohammed Abo Moati Stationaries (TADAWUL:4191) Headed For Trouble?

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Abdullah Saad Mohammed Abo Moati Stationaries (TADAWUL:4191), we weren't too upbeat about how things were going.

What is 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)

0.062 = ر.س15m ÷ (ر.س339m - ر.س100m) (Based on the trailing twelve months to September 2020).

Thus, Abdullah Saad Mohammed Abo Moati Stationaries has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 9.9%.

Check out our latest analysis for Abdullah Saad Mohammed Abo Moati Stationaries

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'd like to look at how Abdullah Saad Mohammed Abo Moati Stationaries 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 Abdullah Saad Mohammed Abo Moati Stationaries' ROCE Trend?

We are a bit worried about the trend of returns on capital at Abdullah Saad Mohammed Abo Moati Stationaries. About five years ago, returns on capital were 13%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 side note, Abdullah Saad Mohammed Abo Moati Stationaries has done well to pay down its current liabilities to 30% 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.

The Bottom Line On 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. Since the stock has skyrocketed 211% over the last three 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.

One final note, you should learn about the 2 warning signs we've spotted with Abdullah Saad Mohammed Abo Moati Stationaries (including 1 which is shouldn't be ignored) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.
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