Saudi Airlines Catering (TADAWUL:6004) May Have Issues Allocating Its Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining 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. And from a first read, things don't look too good at Saudi Airlines Catering (TADAWUL:6004), so let's see why.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.16 = ر.س242m ÷ (ر.س2.1b - ر.س640m) (Based on the trailing twelve months to September 2022).

Therefore, Saudi Airlines Catering has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 8.2% it's much better.

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'd like, you can check out the forecasts from the analysts covering Saudi Airlines Catering here for free.

What Can We Tell From Saudi Airlines Catering's ROCE Trend?

We are a bit worried about the trend of returns on capital at Saudi Airlines Catering. Unfortunately the returns on capital have diminished from the 36% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. 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.

The Bottom Line On Saudi Airlines Catering's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 12% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Saudi Airlines Catering could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Saudi Airlines Catering 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.