National Gas and Industrialization (TADAWUL:2080) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating National Gas and Industrialization (TADAWUL:2080), we don't think it's current trends fit the mold of a multi-bagger.

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

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. 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)

0.059 = ر.س123m ÷ (ر.س2.5b - ر.س455m) (Based on the trailing twelve months to March 2023).

So, National Gas and Industrialization has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Gas Utilities industry average of 8.2%.

See our latest analysis for National Gas and Industrialization

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'd like to look at how National Gas and Industrialization has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

SWOT Analysis for National Gas and Industrialization

What Does the ROCE Trend For National Gas and Industrialization Tell Us?

On the surface, the trend of ROCE at National Gas and Industrialization doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 5.9%. 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.

The Bottom Line

While returns have fallen for National Gas and Industrialization in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 171% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to continue researching National Gas and Industrialization, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.