Saudi Steel Pipes (TADAWUL:1320) Is Experiencing Growth In Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Saudi Steel Pipes (TADAWUL:1320) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Saudi Steel Pipes:

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

0.082 = ر.س56m ÷ (ر.س1.0b - ر.س329m) (Based on the trailing twelve months to March 2023).

Thus, Saudi Steel Pipes has an ROCE of 8.2%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 13%.

View our latest analysis for Saudi Steel Pipes

In the above chart we have measured Saudi Steel Pipes' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Saudi Steel Pipes.

What The Trend Of ROCE Can Tell Us

You'd find it hard not to be impressed with the ROCE trend at Saudi Steel Pipes. The figures show that over the last five years, returns on capital have grown by 68%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 25% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Bottom Line

From what we've seen above, Saudi Steel Pipes has managed to increase it's returns on capital all the while reducing it's capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 72% return over the last five years. In light of that, we think it's worth looking further into this stock because if Saudi Steel Pipes can keep these trends up, it could have a bright future ahead.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

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.