Saudi Arabian Oil (TADAWUL:2222) Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Saudi Arabian Oil (TADAWUL:2222), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

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Understanding 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. Analysts use this formula to calculate it for Saudi Arabian Oil:

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

0.37 = ر.س785b ÷ (ر.س2.4t - ر.س299b) (Based on the trailing twelve months to December 2024).

Therefore, Saudi Arabian Oil has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 9.5%.

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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Saudi Arabian Oil .

What Can We Tell From Saudi Arabian Oil's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 53% five years ago, while capital employed has grown 66%. Usually this isn't ideal, but given Saudi Arabian Oil conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Saudi Arabian Oil might not have received a full period of earnings contribution from it. It's also worth noting the company's latest EBIT figure is within 10% of the previous year, so it's fair to assign the ROCE drop largely to the capital raise.

The Bottom Line On Saudi Arabian Oil's ROCE

To conclude, we've found that Saudi Arabian Oil is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 22% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we've found 1 warning sign for Saudi Arabian Oil that we think you should be aware of.

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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.