Here's What's Concerning About Yanbu National Petrochemical's (TADAWUL:2290) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Yanbu National Petrochemical (TADAWUL:2290), the trends above didn't look too great.

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)

0.033 = ر.س425m ÷ (ر.س14b - ر.س1.2b) (Based on the trailing twelve months to September 2024).

So, Yanbu National Petrochemical has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 4.3%.

See our latest analysis for Yanbu National Petrochemical

In the above chart we have measured Yanbu National Petrochemical's 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 Yanbu National Petrochemical for free.

What Can We Tell From Yanbu National Petrochemical's ROCE Trend?

The trend of ROCE at Yanbu National Petrochemical is showing some signs of weakness. The company used to generate 6.6% on its capital five years ago but it has since fallen noticeably. In addition to that, Yanbu National Petrochemical is now employing 23% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Bottom Line On Yanbu National Petrochemical's ROCE

To see Yanbu National Petrochemical reducing the capital employed in the business in tandem with diminishing returns, is concerning. It should come as no surprise then that the stock has fallen 11% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we've found 1 warning sign for Yanbu National Petrochemical that we think you should be aware of.

While Yanbu National Petrochemical 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.