National Shipping Company of Saudi Arabia (TADAWUL:4030) Is Finding It Tricky To Allocate Its Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into National Shipping Company of Saudi Arabia (TADAWUL:4030), we weren't too upbeat about how things were going.

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. The formula for this calculation on National Shipping Company of Saudi Arabia is:

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

0.028 = ر.س425m ÷ (ر.س22b - ر.س6.7b) (Based on the trailing twelve months to December 2021).

So, National Shipping Company of Saudi Arabia has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 6.5%.

View our latest analysis for National Shipping Company of Saudi Arabia

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating National Shipping Company of Saudi Arabia's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trend of returns that National Shipping Company of Saudi Arabia is generating are raising some concerns. The company used to generate 9.6% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 20% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, National Shipping Company of Saudi Arabia's current liabilities have increased over the last five years to 31% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.8%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From National Shipping Company of Saudi Arabia's ROCE

In summary, it's unfortunate that National Shipping Company of Saudi Arabia is shrinking its capital base and also generating lower returns. Investors must expect better things on the horizon though because the stock has risen 21% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to know some of the risks facing National Shipping Company of Saudi Arabia we've found 4 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

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.