The Trends At Saudi Arabian Oil (TADAWUL:2222) That You Should Know About

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, while the ROCE is currently high for Saudi Arabian Oil (TADAWUL:2222), we aren't jumping out of our chairs because returns are decreasing.

Understanding 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 Arabian Oil:

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

0.27 = ر.س442b ÷ (ر.س1.9t - ر.س228b) (Based on the trailing twelve months to September 2020).

So, Saudi Arabian Oil has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 7.7%.

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.

The Trend Of ROCE

When we looked at the ROCE trend at Saudi Arabian Oil, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 56% where it was three years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Saudi Arabian Oil have fallen, meanwhile the business is employing more capital than it was three years ago. In spite of that, the stock has delivered a 5.9% return to shareholders who held over the last year. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Like most companies, Saudi Arabian Oil does come with some risks, and we've found 2 warning signs 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. 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.
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