Be Wary Of Saudi Marketing (TADAWUL:4006) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Saudi Marketing (TADAWUL:4006) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Saudi Marketing is:

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

0.049 = ر.س67m ÷ (ر.س2.3b - ر.س933m) (Based on the trailing twelve months to March 2021).

Therefore, Saudi Marketing has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 8.8%.

Check out our latest analysis for Saudi Marketing

Above you can see how the current ROCE for Saudi Marketing compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Saudi Marketing here for free.

What Can We Tell From Saudi Marketing's ROCE Trend?

When we looked at the ROCE trend at Saudi Marketing, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.9% from 15% five years ago. However it looks like Saudi Marketing might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Saudi Marketing has a high ratio of current liabilities to total assets of 40%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Saudi Marketing's ROCE

To conclude, we've found that Saudi Marketing is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know about the risks facing Saudi Marketing, we've discovered 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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