To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Looking at Zahrat Al Waha For Trading (TADAWUL:3007), it does have a high ROCE right now, but lets see how returns are trending.
What is 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 Zahrat Al Waha For Trading is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.25 = ر.س77m ÷ (ر.س479m – ر.س174m) (Based on the trailing twelve months to March 2020).
Thus, Zahrat Al Waha For Trading has an ROCE of 25%. In absolute terms that’s a great return and it’s even better than the Packaging industry average of 9.8%.
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 want to delve into the historical earnings, revenue and cash flow of Zahrat Al Waha For Trading, check out these free graphs here.
What Does the ROCE Trend For Zahrat Al Waha For Trading Tell Us?
When we looked at the ROCE trend at Zahrat Al Waha For Trading, we didn’t gain much confidence. While it’s comforting that the ROCE is high, five years ago it was 40%. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales, 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.
What We Can Learn From Zahrat Al Waha For Trading’s ROCE
To conclude, we’ve found that Zahrat Al Waha For Trading is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 33% over the last year. However, unless these underlying trends turn more positive, we wouldn’t get our hopes up too high.
One more thing: We’ve identified 3 warning signs with Zahrat Al Waha For Trading (at least 1 which is significant) , and understanding these would certainly be useful.
Zahrat Al Waha For Trading 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. 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.
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