Saudia Dairy & Foodstuff (TADAWUL:2270) May Have Issues Allocating Its Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Saudia Dairy & Foodstuff (TADAWUL:2270) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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. The formula for this calculation on Saudia Dairy & Foodstuff is:

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

0.13 = ر.س237m ÷ (ر.س2.3b - ر.س517m) (Based on the trailing twelve months to March 2022).

Thus, Saudia Dairy & Foodstuff has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 8.6% it's much better.

See our latest analysis for Saudia Dairy & Foodstuff

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Saudia Dairy & Foodstuff Tell Us?

On the surface, the trend of ROCE at Saudia Dairy & Foodstuff doesn't inspire confidence. Over the last five years, returns on capital have decreased to 13% from 23% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Saudia Dairy & Foodstuff's ROCE

To conclude, we've found that Saudia Dairy & Foodstuff is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 57% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 1 warning sign facing Saudia Dairy & Foodstuff that you might find interesting.

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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.