Returns Are Gaining Momentum At Saudi Ceramic (TADAWUL:2040)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Saudi Ceramic's (TADAWUL:2040) returns on capital, so let's have a look.

What Is 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 Saudi Ceramic is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.097 = ر.س216m ÷ (ر.س3.1b - ر.س832m) (Based on the trailing twelve months to December 2022).

So, Saudi Ceramic has an ROCE of 9.7%. In absolute terms, that's a low return and it also under-performs the Building industry average of 16%.

View our latest analysis for Saudi Ceramic

In the above chart we have measured Saudi Ceramic'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.

So How Is Saudi Ceramic's ROCE Trending?

Saudi Ceramic has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 9.7% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Saudi Ceramic has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Bottom Line

As discussed above, Saudi Ceramic appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Saudi Ceramic can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing Saudi Ceramic that you might find interesting.

While Saudi Ceramic 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. 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.