Investors Could Be Concerned With Rabigh Refining and Petrochemical's (TADAWUL:2380) Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Rabigh Refining and Petrochemical (TADAWUL:2380), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Rabigh Refining and Petrochemical:

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

0.00034 = ر.س13m ÷ (ر.س66b - ر.س27b) (Based on the trailing twelve months to December 2022).

Thus, Rabigh Refining and Petrochemical has an ROCE of 0.03%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 11%.

See our latest analysis for Rabigh Refining and Petrochemical

Above you can see how the current ROCE for Rabigh Refining and Petrochemical compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Rabigh Refining and Petrochemical here for free.

What Can We Tell From Rabigh Refining and Petrochemical's ROCE Trend?

We are a bit worried about the trend of returns on capital at Rabigh Refining and Petrochemical. About five years ago, returns on capital were 3.6%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Rabigh Refining and Petrochemical becoming one if things continue as they have.

On a side note, Rabigh Refining and Petrochemical's current liabilities have increased over the last five years to 41% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 0.03%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 37% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know about the risks facing Rabigh Refining and Petrochemical, we've discovered 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.