There Are Reasons To Feel Uneasy About Saudi Arabian Oil's (TADAWUL:2222) Returns On Capital

By
Simply Wall St
Published
June 10, 2021
SASE:2222
Source: Shutterstock

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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.

Return On Capital Employed (ROCE): What is it?

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)

0.24 = ر.س405b ÷ (ر.س2.0t - ر.س232b) (Based on the trailing twelve months to March 2021).

Thus, Saudi Arabian Oil has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 8.0% earned by companies in a similar industry.

See our latest analysis for Saudi Arabian Oil

roce
SASE:2222 Return on Capital Employed June 11th 2021

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, you can check out the forecasts from the analysts covering Saudi Arabian Oil here for free.

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

On the surface, the trend of ROCE at Saudi Arabian Oil doesn't inspire confidence. While it's comforting that the ROCE is high, four years ago it was 44%. 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 Bottom Line On Saudi Arabian Oil's ROCE

In summary, we're somewhat concerned by Saudi Arabian Oil's diminishing returns on increasing amounts of capital. However the stock has delivered a 14% return to shareholders over the last year, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching Saudi Arabian Oil, you might be interested to know about the 2 warning signs that our analysis has discovered.

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. 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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Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.