Many Would Be Envious Of Edarat Communication and Information Technology's (TADAWUL:9557) Excellent Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.45 = ر.س20m ÷ (ر.س61m - ر.س16m) (Based on the trailing twelve months to December 2023).

Therefore, Edarat Communication and Information Technology has an ROCE of 45%. In absolute terms that's a great return and it's even better than the IT industry average of 30%.

View our latest analysis for Edarat Communication and Information Technology

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 Edarat Communication and Information Technology's past further, check out this free graph covering Edarat Communication and Information Technology's past earnings, revenue and cash flow.

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 411% more capital in the last three years, and the returns on that capital have remained stable at 45%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

On a side note, Edarat Communication and Information Technology has done well to reduce current liabilities to 27% of total assets over the last three years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Edarat Communication and Information Technology's ROCE

Edarat Communication and Information Technology has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has followed suit returning a meaningful 33% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Edarat Communication and Information Technology (of which 1 can't be ignored!) that you should know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.