Investors Could Be Concerned With Saudi Basic Industries' (TADAWUL:2010) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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 to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Saudi Basic Industries (TADAWUL:2010), we weren't too hopeful.

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What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Saudi Basic Industries:

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

0.018 = ر.س4.2b ÷ (ر.س272b - ر.س36b) (Based on the trailing twelve months to March 2025).

So, Saudi Basic Industries has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.4%.

See our latest analysis for Saudi Basic Industries

In the above chart we have measured Saudi Basic Industries' 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 Basic Industries for free.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Saudi Basic Industries. To be more specific, the ROCE was 2.4% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Saudi Basic Industries to turn into a multi-bagger.

The Bottom Line On Saudi Basic Industries' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 24% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Saudi Basic Industries does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While Saudi Basic Industries isn't earning the highest return, check out this free list of companies that are 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.