The Return Trends At Rabigh Refining and Petrochemical (TADAWUL:2380) Look Promising

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Rabigh Refining and Petrochemical's (TADAWUL:2380) returns on capital, so let's have a look.

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 Rabigh Refining and Petrochemical:

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

0.055 = ر.س2.8b ÷ (ر.س73b - ر.س22b) (Based on the trailing twelve months to September 2021).

Thus, Rabigh Refining and Petrochemical has an ROCE of 5.5%. In absolute terms, that's a low return but it's around the Oil and Gas industry average of 6.5%.

Check out our latest analysis for Rabigh Refining and Petrochemical

In the above chart we have measured Rabigh Refining and Petrochemical'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 Rabigh Refining and Petrochemical here for free.

So How Is Rabigh Refining and Petrochemical's ROCE Trending?

Shareholders will be relieved that Rabigh Refining and Petrochemical has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 5.5%, which is always encouraging. While returns have increased, the amount of capital employed by Rabigh Refining and Petrochemical has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 30% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line On Rabigh Refining and Petrochemical's ROCE

To sum it up, Rabigh Refining and Petrochemical is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 112% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Rabigh Refining and Petrochemical can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 3 warning signs we've spotted with Rabigh Refining and Petrochemical (including 2 which are a bit unpleasant) .

While Rabigh Refining and Petrochemical isn't earning the highest return, check out this free list of companies that are 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.