Stock Analysis

Returns On Capital At Yanbu National Petrochemical (TADAWUL:2290) Paint A Concerning Picture

SASE:2290
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When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Yanbu National Petrochemical (TADAWUL:2290) we aren't filled with optimism, but let's investigate further.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.077 = ر.س1.2b ÷ (ر.س17b - ر.س1.6b) (Based on the trailing twelve months to June 2022).

Therefore, Yanbu National Petrochemical has an ROCE of 7.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 9.6%.

See our latest analysis for Yanbu National Petrochemical

roce
SASE:2290 Return on Capital Employed August 21st 2022

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'd like to see what analysts are forecasting going forward, you should check out our free report for Yanbu National Petrochemical.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Yanbu National Petrochemical, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 13% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. 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. Investors must expect better things on the horizon though because the stock has risen 22% in 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.

Yanbu National Petrochemical does have some risks though, and we've spotted 2 warning signs for Yanbu National Petrochemical that you might be interested in.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Yanbu National Petrochemical is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.