Here's What's Concerning About National Gas and Industrialization's (TADAWUL:2080) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. However, after investigating National Gas and Industrialization (TADAWUL:2080), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on National Gas and Industrialization is:

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

0.062 = ر.س125m ÷ (ر.س2.5b - ر.س521m) (Based on the trailing twelve months to June 2023).

Thus, National Gas and Industrialization has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Gas Utilities industry average of 8.3%.

Check out our latest analysis for National Gas and Industrialization

Historical performance is a great place to start when researching a stock so above you can see the gauge for National Gas and Industrialization's ROCE against it's prior returns. If you're interested in investigating National Gas and Industrialization's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at National Gas and Industrialization, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.2% from 12% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that National Gas and Industrialization is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 194% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

National Gas and Industrialization does have some risks though, and we've spotted 1 warning sign for National Gas and Industrialization that you might be interested in.

While National Gas and Industrialization may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.