Alkhorayef Water and Power Technologies (TADAWUL:2081) Is Reinvesting At Lower Rates Of Return

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Alkhorayef Water and Power Technologies (TADAWUL:2081), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

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Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Alkhorayef Water and Power Technologies, this is the formula:

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

0.24 = ر.س313m ÷ (ر.س2.9b - ر.س1.6b) (Based on the trailing twelve months to March 2025).

So, Alkhorayef Water and Power Technologies has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 7.1% earned by companies in a similar industry.

Check out our latest analysis for Alkhorayef Water and Power Technologies

Above you can see how the current ROCE for Alkhorayef Water and Power Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Alkhorayef Water and Power Technologies .

The Trend Of ROCE

In terms of Alkhorayef Water and Power Technologies' historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 33% where it was 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Alkhorayef Water and Power Technologies' current liabilities have increased over the last five years to 55% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 24%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

What We Can Learn From Alkhorayef Water and Power Technologies' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Alkhorayef Water and Power Technologies. And the stock has followed suit returning a meaningful 73% to shareholders over the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Alkhorayef Water and Power Technologies does have some risks though, and we've spotted 2 warning signs for Alkhorayef Water and Power Technologies that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.