Shareholders Would Enjoy A Repeat Of Etihad Atheeb Telecommunication's (TADAWUL:7040) Recent Growth In Returns

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at Etihad Atheeb Telecommunication's (TADAWUL:7040) look very promising so lets take a look.

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

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 Etihad Atheeb Telecommunication, this is the formula:

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

0.26 = ر.س118m ÷ (ر.س954m - ر.س495m) (Based on the trailing twelve months to September 2023).

Thus, Etihad Atheeb Telecommunication has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Telecom industry average of 11%.

Check out our latest analysis for Etihad Atheeb Telecommunication

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

What The Trend Of ROCE Can Tell Us

Etihad Atheeb Telecommunication has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 26% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 52%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

Our Take On Etihad Atheeb Telecommunication's ROCE

As discussed above, Etihad Atheeb Telecommunication appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 265% total return over the last year tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Etihad Atheeb Telecommunication can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for Etihad Atheeb Telecommunication that we think you should be aware of.

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.