Stock Analysis

The Returns On Capital At Yanbu National Petrochemical (TADAWUL:2290) Don't Inspire Confidence

SASE:2290
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If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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 to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Yanbu National Petrochemical (TADAWUL:2290) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

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)

0.097 = ر.س1.5b ÷ (ر.س17b - ر.س1.7b) (Based on the trailing twelve months to March 2022).

Thus, Yanbu National Petrochemical has an ROCE of 9.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.7%.

View our latest analysis for Yanbu National Petrochemical

roce
SASE:2290 Return on Capital Employed May 2nd 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Yanbu National Petrochemical Tell Us?

We are a bit worried about the trend of returns on capital at Yanbu National Petrochemical. About five years ago, returns on capital were 15%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. However the stock has delivered a 45% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Yanbu National Petrochemical does have some risks though, and we've spotted 1 warning sign for Yanbu National Petrochemical that you might be interested in.

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.

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.