Alhasoob (TADAWUL:9522) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Alhasoob (TADAWUL:9522), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. To calculate this metric for Alhasoob, this is the formula:

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

0.076 = ر.س2.9m ÷ (ر.س100m - ر.س62m) (Based on the trailing twelve months to December 2023).

Therefore, Alhasoob has an ROCE of 7.6%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 15%.

See our latest analysis for Alhasoob

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

The Trend Of ROCE

On the surface, the trend of ROCE at Alhasoob doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.6% from 46% five years ago. However it looks like Alhasoob might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Alhasoob has done well to pay down its current liabilities to 62% 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. Keep in mind 62% is still pretty high, so those risks are still somewhat prevalent.

In Conclusion...

In summary, Alhasoob is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 44% in the last year. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Alhasoob (of which 1 can't be ignored!) that you should know about.

While Alhasoob isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.