Stock Analysis

Returns On Capital Tell Us A Lot About Yanbu National Petrochemical (TADAWUL:2290)

SASE:2290
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If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Yanbu National Petrochemical (TADAWUL:2290), 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 Yanbu National Petrochemical, this is the formula:

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

0.044 = ر.س710m ÷ (ر.س17b - ر.س1.3b) (Based on the trailing twelve months to December 2020).

Thus, Yanbu National Petrochemical has an ROCE of 4.4%. On its own, that's a low figure but it's around the 5.3% average generated by the Chemicals industry.

Check out our latest analysis for Yanbu National Petrochemical

roce
SASE:2290 Return on Capital Employed March 12th 2021

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 here for free.

How Are Returns Trending?

In terms of Yanbu National Petrochemical's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 8.5% 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. If these trends continue, we wouldn't expect Yanbu National Petrochemical to turn into a multi-bagger.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these poor fundamentals, the stock has gained a huge 140% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 1 warning sign facing Yanbu National Petrochemical that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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