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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at National Gas & Industerialization (TADAWUL:2080) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for National Gas & Industerialization, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = ر.س47m ÷ (ر.س2.4b - ر.س494m) (Based on the trailing twelve months to March 2021).
Thus, National Gas & Industerialization has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Gas Utilities industry average of 7.4%.
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 National Gas & Industerialization's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For National Gas & Industerialization Tell Us?
When we looked at the ROCE trend at National Gas & Industerialization, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. However it looks like National Gas & Industerialization might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
Bringing it all together, while we're somewhat encouraged by National Gas & Industerialization's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 97% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
If you'd like to know about the risks facing National Gas & Industerialization, we've discovered 1 warning sign that you should be aware of.
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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