Saudi Steel Pipes (TADAWUL:1320) Is Very Good At Capital Allocation

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Saudi Steel Pipes (TADAWUL:1320) looks great, so lets see what the trend can tell us.

What Is 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. To calculate this metric for Saudi Steel Pipes, this is the formula:

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

0.30 = ر.س350m ÷ (ر.س1.8b - ر.س583m) (Based on the trailing twelve months to September 2024).

Thus, Saudi Steel Pipes has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

Check out our latest analysis for Saudi Steel Pipes

Above you can see how the current ROCE for Saudi Steel Pipes 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 analyst report for Saudi Steel Pipes .

What Can We Tell From Saudi Steel Pipes' ROCE Trend?

We're delighted to see that Saudi Steel Pipes is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 30% which is a sight for sore eyes. In addition to that, Saudi Steel Pipes is employing 72% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In Conclusion...

To the delight of most shareholders, Saudi Steel Pipes has now broken into profitability. Since the stock has returned a staggering 265% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.

While Saudi Steel Pipes looks impressive, no company is worth an infinite price. The intrinsic value infographic for 1320 helps visualize whether it is currently trading for a fair price.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.