Savola Group (TADAWUL:2050) Shareholders Will Want The ROCE Trajectory To Continue

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Savola Group's (TADAWUL:2050) returns on capital, so let's have a look.

Our free stock report includes 4 warning signs investors should be aware of before investing in Savola Group. Read for free now.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.11 = ر.س1.0b ÷ (ر.س21b - ر.س12b) (Based on the trailing twelve months to December 2024).

Thus, Savola Group has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 12% generated by the Food industry.

See 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're interested, you can view the analysts predictions in our free analyst report for Savola Group .

The Trend Of ROCE

We're pretty happy with how the ROCE has been trending at Savola Group. The figures show that over the last five years, returns on capital have grown by 153%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Savola Group appears to been achieving more with less, since the business is using 45% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 54% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Bottom Line

From what we've seen above, Savola Group has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has only returned 27% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Savola Group does have some risks, we noticed 4 warning signs (and 3 which are a bit concerning) we think you should know about.

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.