Saudi Arabian Oil (TADAWUL:2222) Might Become A Compounding Machine

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Saudi Arabian Oil (TADAWUL:2222) looks attractive right now, so lets see what the trend of returns can tell us.

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. 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)

0.42 = ر.س771b ÷ (ر.س2.2t - ر.س304b) (Based on the trailing twelve months to December 2021).

Thus, Saudi Arabian Oil has an ROCE of 42%. That's a fantastic return and not only that, it outpaces the average of 7.6% earned by companies in a similar industry.

View 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Saudi Arabian Oil Tell Us?

In terms of Saudi Arabian Oil's history of ROCE, it's quite impressive. The company has consistently earned 42% for the last five years, and the capital employed within the business has risen 121% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

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 the stock has followed suit returning a meaningful 25% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Like most companies, Saudi Arabian Oil does come with some risks, and we've found 1 warning sign that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.