Saudi Airlines Catering's (TADAWUL:6004) Returns On Capital Not Reflecting Well On The Business

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. And from a first read, things don't look too good at Saudi Airlines Catering (TADAWUL:6004), so let's see why.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Saudi Airlines Catering is:

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

0.18 = ر.س263m ÷ (ر.س2.0b - ر.س563m) (Based on the trailing twelve months to December 2022).

Therefore, Saudi Airlines Catering has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 7.8% it's much better.

Check out our latest analysis for Saudi Airlines Catering

Above you can see how the current ROCE for Saudi Airlines Catering compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Saudi Airlines Catering. About five years ago, returns on capital were 37%, however they're now substantially lower than that as we saw above. 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. If these trends continue, we wouldn't expect Saudi Airlines Catering to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Saudi Airlines Catering is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 30% 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.

If you're still interested in Saudi Airlines Catering it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.