Saudi Marketing (TADAWUL:4006) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Saudi Marketing (TADAWUL:4006) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Saudi Marketing is:

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

0.039 = ر.س53m ÷ (ر.س2.3b - ر.س912m) (Based on the trailing twelve months to March 2022).

Thus, Saudi Marketing has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 13%.

See our latest analysis for Saudi Marketing

Historical performance is a great place to start when researching a stock so above you can see the gauge for Saudi Marketing's ROCE against it's prior returns. If you're interested in investigating Saudi Marketing's past further, check out this free graph of past earnings, revenue and cash flow.

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

On the surface, the trend of ROCE at Saudi Marketing doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.9% from 13% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

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.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Saudi Marketing's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 15% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we found 3 warning signs for Saudi Marketing (2 are a bit concerning) you should be aware of.

While Saudi Marketing 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.