Capital Investments At Saudi Arabian Oil (TADAWUL:2222) Point To A Promising Future

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Saudi Arabian Oil's (TADAWUL:2222) ROCE trend, we were very happy with what we saw.

What is 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. To calculate this metric for Saudi Arabian Oil, this is the formula:

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

0.46 = ر.س897b ÷ (ر.س2.3t - ر.س370b) (Based on the trailing twelve months to March 2022).

Therefore, Saudi Arabian Oil has an ROCE of 46%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 8.0%.

Check out our latest analysis for Saudi Arabian Oil

Above you can see how the current ROCE for Saudi Arabian Oil 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 Arabian Oil here for free.

The Trend Of ROCE

It's hard not to be impressed by Saudi Arabian Oil's returns on capital. Over the past five years, ROCE has remained relatively flat at around 46% and the business has deployed 127% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Saudi Arabian Oil can keep this up, we'd be very optimistic about its future.

What We Can Learn From Saudi Arabian Oil's ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And since the stock has risen strongly over the last year, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Saudi Arabian Oil does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

Saudi Arabian Oil is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.