Edarat Communication and Information Technology (TADAWUL:9557) Knows How To Allocate Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Edarat Communication and Information Technology's (TADAWUL:9557) ROCE trend, we were very happy with what we saw.

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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 Edarat Communication and Information Technology:

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

0.42 = ر.س23m ÷ (ر.س72m - ر.س17m) (Based on the trailing twelve months to June 2024).

Thus, Edarat Communication and Information Technology has an ROCE of 42%. That's a fantastic return and not only that, it outpaces the average of 29% earned by companies in a similar industry.

See our latest analysis for Edarat Communication and Information Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Edarat Communication and Information Technology's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Edarat Communication and Information Technology .

What Does the ROCE Trend For Edarat Communication and Information Technology Tell Us?

We'd be pretty happy with returns on capital like Edarat Communication and Information Technology. The company has employed 364% more capital in the last three years, and the returns on that capital have remained stable at 42%. Now considering ROCE is an attractive 42%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a side note, Edarat Communication and Information Technology has done well to reduce current liabilities to 23% of total assets over the last three years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has followed suit returning a meaningful 98% to shareholders over the last year. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we found 2 warning signs for Edarat Communication and Information Technology (1 shouldn't be ignored) you should be aware of.

Edarat Communication and Information Technology is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.