Capital Investment Trends At Alkhorayef Water and Power Technologies (TADAWUL:2081) Look Strong

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Alkhorayef Water and Power Technologies' (TADAWUL:2081) ROCE trend, we were very happy with what we saw.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.31 = ر.س264m ÷ (ر.س2.3b - ر.س1.4b) (Based on the trailing twelve months to September 2024).

Therefore, Alkhorayef Water and Power Technologies has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Water Utilities industry average of 7.3%.

Check out our latest analysis for Alkhorayef Water and Power Technologies

In the above chart we have measured Alkhorayef Water and Power Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Alkhorayef Water and Power Technologies .

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

Alkhorayef Water and Power Technologies deserves to be commended in regards to it's returns. The company has employed 268% more capital in the last five years, and the returns on that capital have remained stable at 31%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Alkhorayef Water and Power Technologies can keep this up, we'd be very optimistic about its future.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 63% of total assets, this reported ROCE would probably be less than31% because total capital employed would be higher.The 31% ROCE could be even lower if current liabilities weren't 63% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

The Bottom Line On Alkhorayef Water and Power Technologies' ROCE

In summary, we're delighted to see that Alkhorayef Water and Power Technologies has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has done incredibly well with a 147% return over the last three years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you want to continue researching Alkhorayef Water and Power Technologies, you might be interested to know about the 1 warning sign that our analysis has discovered.

Alkhorayef Water and Power Technologies is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.