Returns On Capital Signal Difficult Times Ahead For Saudi Airlines Catering (TADAWUL:6004)

When researching a stock for investment, what can tell us that the company is 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Saudi Airlines Catering (TADAWUL:6004), we weren't too upbeat about how things were going.

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. Analysts use this formula to calculate it for Saudi Airlines Catering:

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

0.13 = ر.س187m ÷ (ر.س2.0b - ر.س577m) (Based on the trailing twelve months to June 2022).

Therefore, Saudi Airlines Catering has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 7.6% generated by the Commercial Services industry.

See 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Saudi Airlines Catering Tell Us?

In terms of Saudi Airlines Catering's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 37%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Saudi Airlines Catering to turn into a multi-bagger.

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. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

While Saudi Airlines Catering doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While Saudi Airlines Catering isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.