Saudi Basic Industries (TADAWUL:2010) May Have Issues Allocating Its Capital

What financial metrics can indicate to us that a company is maturing or even in decline? 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. In light of that, from a first glance at Saudi Basic Industries (TADAWUL:2010), we've spotted some signs that it could be struggling, so let's investigate.

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 Basic Industries, this is the formula:

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

0.018 = ر.س4.3b ÷ (ر.س285b - ر.س46b) (Based on the trailing twelve months to June 2024).

So, Saudi Basic Industries has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.1%.

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're interested, you can view the analysts predictions in our free analyst report for Saudi Basic Industries .

What Can We Tell From Saudi Basic Industries' ROCE Trend?

In terms of Saudi Basic Industries' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 8.8%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Saudi Basic Industries becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Saudi Basic Industries is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 1.5% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

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

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.