The Trend Of High Returns At Saudi Steel Pipes (TADAWUL:1320) Has Us Very Interested

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Saudi Steel Pipes (TADAWUL:1320) we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.28 = ر.س323m ÷ (ر.س1.8b - ر.س607m) (Based on the trailing twelve months to June 2024).

Thus, Saudi Steel Pipes has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

See 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, you can check out the forecasts from the analysts covering Saudi Steel Pipes for free.

What The Trend Of ROCE Can Tell Us

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 28% which is a sight for sore eyes. In addition to that, Saudi Steel Pipes is employing 67% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line

To the delight of most shareholders, Saudi Steel Pipes has now broken into profitability. And a remarkable 268% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

If you'd like to know about the risks facing Saudi Steel Pipes, we've discovered 1 warning sign that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.