Here's What's Concerning About Al-Yamamah Steel Industries (TADAWUL:1304)

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Al-Yamamah Steel Industries (TADAWUL:1304) we aren't filled with optimism, but let's investigate further.

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. 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)

0.065 = ر.س55m ÷ (ر.س1.5b - ر.س675m) (Based on the trailing twelve months to June 2020).

Therefore, Al-Yamamah Steel Industries has an ROCE of 6.5%. Even though it's in line with the industry average of 7.2%, it's still a low return by itself.

See our latest analysis for Al-Yamamah Steel Industries

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Al-Yamamah Steel Industries, check out these free graphs here.

What Can We Tell From Al-Yamamah Steel Industries' ROCE Trend?

In terms of Al-Yamamah Steel Industries' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 26%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Al-Yamamah Steel Industries becoming one if things continue as they have.

Another thing to note, Al-Yamamah Steel Industries has a high ratio of current liabilities to total assets of 44%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Al-Yamamah Steel Industries' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Despite the concerning underlying trends, the stock has actually gained 22% over the last three years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Al-Yamamah Steel Industries does have some risks, we noticed 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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