When we’re researching a company, it’s sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Saudi Arabian Mining Company (Ma’aden) (TADAWUL:1211) we aren’t filled with optimism, but let’s investigate further.
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 Saudi Arabian Mining Company (Ma’aden), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.0053 = ر.س470m ÷ (ر.س97b – ر.س9.0b) (Based on the trailing twelve months to March 2020).
Thus, Saudi Arabian Mining Company (Ma’aden) has an ROCE of 0.5%. In absolute terms, that’s a low return and it also under-performs the Metals and Mining industry average of 7.0%.
In the above chart we have a measured Saudi Arabian Mining Company (Ma’aden)’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
In terms of Saudi Arabian Mining Company (Ma’aden)’s historical ROCE movements, the trend doesn’t inspire confidence. About five years ago, returns on capital were 2.9%, however they’re now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren’t as high due potentially to new competition or smaller margins. If these trends continue, we wouldn’t expect Saudi Arabian Mining Company (Ma’aden) to turn into a multi-bagger.
In summary, it’s unfortunate that Saudi Arabian Mining Company (Ma’aden) is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 18% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we’d consider looking elsewhere.
Saudi Arabian Mining Company (Ma’aden) does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.
While Saudi Arabian Mining Company (Ma’aden) 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.
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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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