Alkhorayef Water and Power Technologies (TADAWUL:2081) Might Be Having Difficulty Using Its Capital Effectively

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, while the ROCE is currently high for Alkhorayef Water and Power Technologies (TADAWUL:2081), we aren't jumping out of our chairs because returns are decreasing.

Understanding Return On Capital Employed (ROCE)

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 Alkhorayef Water and Power Technologies is:

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

0.21 = ر.س149m ÷ (ر.س1.4b - ر.س690m) (Based on the trailing twelve months to March 2023).

So, Alkhorayef Water and Power Technologies has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Water Utilities industry average of 6.9%.

See 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 report for Alkhorayef Water and Power Technologies.

What Can We Tell From Alkhorayef Water and Power Technologies' ROCE Trend?

In terms of Alkhorayef Water and Power Technologies' historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 29%, but they have dropped over the last five years. 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.

On a side note, Alkhorayef Water and Power Technologies has done well to pay down its current liabilities to 50% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On 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 24% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to know some of the risks facing Alkhorayef Water and Power Technologies we've found 3 warning signs (2 are significant!) that you should be aware of before investing here.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.