Returns At Savola Group (TADAWUL:2050) Appear To Be Weighed Down

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Savola Group (TADAWUL:2050), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Savola Group is:

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

0.051 = ر.س977m ÷ (ر.س29b - ر.س10.0b) (Based on the trailing twelve months to March 2021).

Thus, Savola Group has an ROCE of 5.1%. Even though it's in line with the industry average of 5.1%, it's still a low return by itself.

View our latest analysis for Savola Group

Above you can see how the current ROCE for Savola Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Savola Group.

What Does the ROCE Trend For Savola Group Tell Us?

Over the past five years, Savola Group's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Savola Group doesn't end up being a multi-bagger in a few years time. This probably explains why Savola Group is paying out 45% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

The Bottom Line

In summary, Savola Group isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 13% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Savola Group does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

While Savola Group 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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