Here's What's Concerning About Fad International's (TADAWUL:9589) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Fad International (TADAWUL:9589), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Fad International:

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

0.059 = ر.س2.7m ÷ (ر.س77m - ر.س31m) (Based on the trailing twelve months to June 2024).

Thus, Fad International has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 14%.

See our latest analysis for Fad International

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Fad International's past further, check out this free graph covering Fad International's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Fad International doesn't inspire confidence. To be more specific, ROCE has fallen from 52% over the last two years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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 related note, Fad International has decreased its current liabilities to 40% 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. Keep in mind 40% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From Fad International's ROCE

To conclude, we've found that Fad International is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 20% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Fad International does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

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

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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.