Here's What's Concerning About Saudia Dairy & Foodstuff's (TADAWUL:2270) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Saudia Dairy & Foodstuff (TADAWUL:2270) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Saudia Dairy & Foodstuff, this is the formula:

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

0.17 = ر.س283m ÷ (ر.س2.4b - ر.س740m) (Based on the trailing twelve months to June 2022).

So, Saudia Dairy & Foodstuff has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 5.8% generated by the Food industry.

Check out the opportunities and risks within the SA Food industry.

Above you can see how the current ROCE for Saudia Dairy & Foodstuff compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Saudia Dairy & Foodstuff here for free.

The Trend Of ROCE

In terms of Saudia Dairy & Foodstuff's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 24%, but since then they've fallen to 17%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 30%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Saudia Dairy & Foodstuff. And long term investors must be optimistic going forward because the stock has returned a huge 111% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching Saudia Dairy & Foodstuff, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.