Be Wary Of Alkhorayef Water and Power Technologies (TADAWUL:2081) And Its Returns On Capital
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Alkhorayef Water and Power Technologies (TADAWUL:2081), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Alkhorayef Water and Power Technologies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = ر.س300m ÷ (ر.س3.0b - ر.س1.4b) (Based on the trailing twelve months to September 2025).
Therefore, Alkhorayef Water and Power Technologies has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 6.5% generated by the Water Utilities industry.
View 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'd like, you can check out the forecasts from the analysts covering Alkhorayef Water and Power Technologies for free.
What Does the ROCE Trend For Alkhorayef Water and Power Technologies Tell Us?
On the surface, the trend of ROCE at Alkhorayef Water and Power Technologies doesn't inspire confidence. Around five years ago the returns on capital were 31%, but since then they've fallen to 19%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 48%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 19%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.
What We Can Learn From Alkhorayef Water and Power Technologies' ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Alkhorayef Water and Power Technologies. And the stock has followed suit returning a meaningful 31% to shareholders over the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.
One more thing to note, we've identified 2 warning signs with Alkhorayef Water and Power Technologies and understanding them should be part of your investment process.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.