Arabian Internet and Communication Services (TADAWUL:7202) Is Aiming To Keep Up Its Impressive Returns

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Ergo, when we looked at the ROCE trends at Arabian Internet and Communication Services (TADAWUL:7202), we liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Arabian Internet and Communication Services is:

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

0.35 = ر.س1.3b ÷ (ر.س10b - ر.س6.6b) (Based on the trailing twelve months to June 2023).

Thus, Arabian Internet and Communication Services has an ROCE of 35%. In absolute terms that's a very respectable return and compared to the IT industry average of 30% it's pretty much on par.

See our latest analysis for Arabian Internet and Communication Services

In the above chart we have measured Arabian Internet and Communication Services' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Arabian Internet and Communication Services' ROCE Trend?

In terms of Arabian Internet and Communication Services' history of ROCE, it's quite impressive. The company has employed 127% more capital in the last five years, and the returns on that capital have remained stable at 35%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Another thing to note, Arabian Internet and Communication Services has a high ratio of current liabilities to total assets of 64%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Arabian Internet and Communication Services' ROCE

In short, we'd argue Arabian Internet and Communication Services has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has followed suit returning a meaningful 21% to shareholders over the last year. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

While Arabian Internet and Communication Services looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 7202 is currently trading for a fair price.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.