Returns At Saudi Arabia Refineries (TADAWUL:2030) Appear To Be Weighed Down

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Saudi Arabia Refineries (TADAWUL:2030) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Saudi Arabia Refineries, this is the formula:

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

0.028 = ر.س14m ÷ (ر.س519m - ر.س9.7m) (Based on the trailing twelve months to December 2020).

Therefore, Saudi Arabia Refineries has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 7.2%.

Check out our latest analysis for Saudi Arabia Refineries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Saudi Arabia Refineries' ROCE against it's prior returns. If you'd like to look at how Saudi Arabia Refineries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Saudi Arabia Refineries. Over the past five years, ROCE has remained relatively flat at around 2.8% and the business has deployed 72% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Saudi Arabia Refineries' ROCE

In summary, Saudi Arabia Refineries has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 529% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Saudi Arabia Refineries does have some risks though, and we've spotted 2 warning signs for Saudi Arabia Refineries that you might be interested in.

While Saudi Arabia Refineries 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. 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.
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