What Do The Returns On Capital At Savola Group (TADAWUL:2050) Tell Us?

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think Savola Group (TADAWUL:2050) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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 Savola Group:

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

0.063 = ر.س1.1b ÷ (ر.س27b - ر.س9.1b) (Based on the trailing twelve months to September 2020).

Therefore, Savola Group has an ROCE of 6.3%. Even though it's in line with the industry average of 6.3%, 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

Over the past five years, Savola Group's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Savola Group doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that Savola Group has been paying out a decent 56% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

The Bottom Line On Savola Group's ROCE

We can conclude that in regards to Savola Group's returns on capital employed and the trends, there isn't much change to report on. Since the stock has declined 12% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing Savola Group that you might find interesting.

While Savola Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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