Returns On Capital - An Important Metric For Saudi Arabia Refineries (TADAWUL:2030)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So on that note, Saudi Arabia Refineries (TADAWUL:2030) looks quite promising in regards to its trends of return on capital.

What is 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. Analysts use this formula to calculate it for Saudi Arabia Refineries:

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

0.037 = ر.س16m ÷ (ر.س447m - ر.س9.8m) (Based on the trailing twelve months to September 2020).

Thus, Saudi Arabia Refineries has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 7.8%.

See 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're interested in investigating Saudi Arabia Refineries' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Saudi Arabia Refineries' ROCE Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 40% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Key Takeaway

To sum it up, Saudi Arabia Refineries is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 180% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Saudi Arabia Refineries does have some risks though, and we've spotted 1 warning sign for Saudi Arabia Refineries that you might be interested in.

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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