Saudi Arabian Oil (TADAWUL:2222) Might Be Having Difficulty Using Its Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at Saudi Arabian Oil (TADAWUL:2222), it does have a high ROCE right now, but lets see how returns are trending.

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)

0.36 = ر.س648b ÷ (ر.س2.1t - ر.س321b) (Based on the trailing twelve months to September 2021).

So, Saudi Arabian Oil has an ROCE of 36%. That's a fantastic return and not only that, it outpaces the average of 6.5% earned by companies in a similar industry.

See our latest analysis for Saudi Arabian Oil

In the above chart we have measured Saudi Arabian Oil's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Saudi Arabian Oil.

So How Is Saudi Arabian Oil's ROCE Trending?

In terms of Saudi Arabian Oil's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 56%, but they have dropped over the last four years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Saudi Arabian Oil is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 8.0% over the last year, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

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

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.