Investors Met With Slowing Returns on Capital At Saudi Chemical Holding (TADAWUL:2230)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Saudi Chemical Holding's (TADAWUL:2230) trend of ROCE, we liked what we saw.

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. To calculate this metric for Saudi Chemical Holding, this is the formula:

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

0.12 = ر.س315m ÷ (ر.س4.9b - ر.س2.4b) (Based on the trailing twelve months to December 2023).

Therefore, Saudi Chemical Holding has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 14% generated by the Healthcare industry.

Check out our latest analysis for Saudi Chemical Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Saudi Chemical Holding's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Saudi Chemical Holding.

So How Is Saudi Chemical Holding's ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has employed 48% more capital in the last five years, and the returns on that capital have remained stable at 12%. 12% is a pretty standard return, and it provides some comfort knowing that Saudi Chemical Holding has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Saudi Chemical Holding has done well to reduce current liabilities to 49% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

The Bottom Line

In the end, Saudi Chemical Holding has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 268% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to know some of the risks facing Saudi Chemical Holding we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Saudi Chemical Holding 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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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.