The Returns On Capital At National Gas & Industerialization (TADAWUL:2080) Don't Inspire Confidence

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at National Gas & Industerialization (TADAWUL:2080) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on National Gas & Industerialization is:

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

0.083 = ر.س156m ÷ (ر.س2.3b - ر.س421m) (Based on the trailing twelve months to December 2020).

So, National Gas & Industerialization has an ROCE of 8.3%. In absolute terms, that's a low return but it's around the Gas Utilities industry average of 7.2%.

View our latest analysis for National Gas & Industerialization

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

So How Is National Gas & Industerialization's ROCE Trending?

On the surface, the trend of ROCE at National Gas & Industerialization doesn't inspire confidence. To be more specific, ROCE has fallen from 11% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

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. Yet to long term shareholders the stock has gifted them an incredible 102% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 1 warning sign facing National Gas & Industerialization that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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