Here’s What’s Concerning Middle East Healthcare’s Return on Capital (TADAWUL: 4009)

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If we are to find multi-bagger potential, there are often underlying trends that can provide clues. Among other things, we’ll want to see two things; first, a growth to come back on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. This shows us that it is a composing machine, capable of continually reinvesting its profits in the business and generating higher returns. However, after briefly reviewing the numbers, we don’t think Middle East Health (TADAWUL: 4009) has the makings of a multi-bagger in the future, but let’s see why this may be the case.

Understanding Return on Capital Employed (ROCE)

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Middle East Healthcare, here is the formula:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.04 = ر.س 120 m ÷ (ر.س 4.2 b – ر.س 1.2 b) (Based on the last twelve months up to March 2021).

So, Middle East Healthcare posts a ROCE of 4.0%. At the end of the day, that’s a low return and it’s below the healthcare industry average of 8.2%.

Check out our latest analysis for healthcare in the Middle East

SASE: 4009 Return on capital employed on August 11, 2021

Above you can see how Middle East Healthcare’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you like, you can view analyst forecasts covering Middle East Healthcare here for free.

The ROCE trend

In terms of Middle East Healthcare’s historic ROCE movements, the trend is not great. To be more precise, ROCE has increased from 21% over the past five years. Although, as income and the amount of assets used in the business have increased, this could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. And if the capital increase generates additional returns, the company, and therefore the shareholders, will benefit in the long run.

The key to take away

Although returns on capital have declined in the short term, we find promise that both revenue and capital employed have increased for Middle East Healthcare. However, despite the promising trends, the stock has fallen 28% over the past five years, so there might be an opportunity here for astute investors. Accordingly, we recommend that you dig deeper into this stock to find out what other business fundamentals can show us.

Like most businesses, Middle East Healthcare comes with certain risks, and we have found 2 warning signs that you need to be aware of.

For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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