Be Wary Of Al-Yamamah Steel Industries (TADAWUL:1304) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Al-Yamamah Steel Industries (TADAWUL:1304) 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Al-Yamamah Steel Industries, this is the formula:

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

0.19 = ر.س171m ÷ (ر.س1.5b - ر.س593m) (Based on the trailing twelve months to December 2020).

So, Al-Yamamah Steel Industries has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 7.7% it's much better.

View our latest analysis for Al-Yamamah Steel Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Al-Yamamah Steel Industries' ROCE against it's prior returns. If you're interested in investigating Al-Yamamah Steel Industries' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Al-Yamamah Steel Industries' ROCE Trending?

When we looked at the ROCE trend at Al-Yamamah Steel Industries, we didn't gain much confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 19%. 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.

What We Can Learn From Al-Yamamah Steel Industries' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Al-Yamamah Steel Industries. Furthermore the stock has climbed 88% over the last three years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 4 warning signs we've spotted with Al-Yamamah Steel Industries (including 1 which is potentially serious) .

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. 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.
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