Be Wary Of Saudi Airlines Catering (TADAWUL:6004) And Its Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Saudi Airlines Catering (TADAWUL:6004) we aren't filled with optimism, but let's investigate further.

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. To calculate this metric for Saudi Airlines Catering, this is the formula:

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

0.20 = ر.س307m ÷ (ر.س2.1b - ر.س585m) (Based on the trailing twelve months to September 2023).

Therefore, Saudi Airlines Catering has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Commercial Services industry average of 7.4%.

Check out our latest analysis for Saudi Airlines Catering

In the above chart we have measured Saudi Airlines Catering's 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 Saudi Airlines Catering here for free.

The Trend Of ROCE

There is reason to be cautious about Saudi Airlines Catering, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 35% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Saudi Airlines Catering becoming one if things continue as they have.

Our Take On Saudi Airlines Catering's ROCE

In summary, it's unfortunate that Saudi Airlines Catering is generating lower returns from the same amount of capital. However the stock has delivered a 46% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

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

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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.