Dallah Healthcare (TADAWUL:4004) Has More To Do To Multiply In Value Going Forward
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Dallah Healthcare (TADAWUL:4004), it didn't seem to tick all of these boxes.
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. The formula for this calculation on Dallah Healthcare is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.087 = ر.س443m ÷ (ر.س6.1b - ر.س1.0b) (Based on the trailing twelve months to June 2023).
Thus, Dallah Healthcare has an ROCE of 8.7%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 15%.
Above you can see how the current ROCE for Dallah Healthcare compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Dallah Healthcare here for free.
What Can We Tell From Dallah Healthcare's ROCE Trend?
The returns on capital haven't changed much for Dallah Healthcare in recent years. Over the past five years, ROCE has remained relatively flat at around 8.7% and the business has deployed 127% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
Our Take On Dallah Healthcare's ROCE
Long story short, while Dallah Healthcare has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 343% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Like most companies, Dallah Healthcare does come with some risks, and we've found 2 warning signs that you should be aware of.
While Dallah Healthcare may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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.