These feedback measures do not make Baazeem (TADAWUL: 4051) trading seem too strong

What financial indicators can tell us that a business is maturing or even in decline? When we see a drop to recover on capital employed (ROCE) in connection with a decrease based capital employed is often how a mature business shows signs of aging. Ultimately, this means that the company earns less per dollar invested and on top of that, it reduces its capital employed base. And from the first reading, things don’t look very good Baazeem Trade (TADAWUL: 4051), let’s see why.

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 Baazeem Trading, here is the formula:

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

0.14 = ر.س 29 m ÷ (ر.س 253 m – ر.س 50 m) (Based on the last twelve months up to September 2021).

Thereby, Baazeem Trading has a ROCE of 14%. On its own, that’s a standard return, but it’s far better than the 6.0% generated by the retail vending industry.

See our latest review for Baazeem Trading

SASE: 4051 Return on capital employed on December 1, 2021

Although the past is not representative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to dive into Baazeem Trading’s profit, income and cash flow history, check out these free graphics here.

What the ROCE trend can tell us

We are a little worried about the evolution of capital returns at Baazeem Trading. Unfortunately, the return on capital has fallen from the 20% they earned five years ago. In addition to this, it should be noted that the amount of capital employed within the company has remained relatively stable. As returns decline and the company has the same number of assets employed, this may suggest that it is a mature company that has not seen much growth in the past five years. So, because these trends are generally not conducive to building a multi-bagger, we won’t hold our breath on Baazeem Trading by becoming one if things continue the way they have.

On a related note, Baazeem Trading reduced its current liabilities to 20% of total assets. This could partly explain the drop in ROCE. In addition, it can reduce some aspects of the risk to the business, as the company’s suppliers or short-term creditors are now less funding its operations. Since the company essentially finances a larger portion of its operations with its own money, you could argue that this has made the company less efficient at generating ROCE.

What we can learn from Baazeem Trading’s ROCE

In summary, it is unfortunate that Baazeem Trading generates lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a whopping 271% over the past three years, so investors are looking very bullish. Either way, we don’t feel very comfortable with the fundamentals so we are avoiding this action for now.

Baazeem Trading carries certain risks, we have noticed that 3 warning signs (and 1 which makes us a little uncomfortable) we think you should be aware of.

While Baazeem Trading does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.

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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 the mentioned stocks.