Stock Analysis

Are Investors Concerned With What's Going On At Yanbu National Petrochemical (TADAWUL:2290)?

SASE:2290
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Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Yanbu National Petrochemical (TADAWUL:2290), we weren't too upbeat about how things were going.

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. To calculate this metric for Yanbu National Petrochemical, this is the formula:

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

0.038 = ر.س593m ÷ (ر.س17b - ر.س1.1b) (Based on the trailing twelve months to September 2020).

So, Yanbu National Petrochemical has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 7.5%.

Check out our latest analysis for Yanbu National Petrochemical

roce
SASE:2290 Return on Capital Employed December 8th 2020

Above you can see how the current ROCE for Yanbu National Petrochemical 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 report on analyst forecasts for the company.

How Are Returns Trending?

There is reason to be cautious about Yanbu National Petrochemical, given the returns are trending downwards. To be more specific, the ROCE was 9.6% 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. 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 Yanbu National Petrochemical becoming one if things continue as they have.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 98% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Like most companies, Yanbu National Petrochemical does come with some risks, and we've found 2 warning signs that you should be aware of.

While Yanbu National Petrochemical may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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