Stock Analysis

These Return Metrics Don't Make Yanbu National Petrochemical (TADAWUL:2290) Look Too Strong

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. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Yanbu National Petrochemical (TADAWUL:2290), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.065 = ر.س1.0b ÷ (ر.س18b - ر.س2.1b) (Based on the trailing twelve months to March 2021).

So, Yanbu National Petrochemical has an ROCE of 6.5%. In absolute terms, that's a low return but it's around the Chemicals industry average of 6.8%.

Check out our latest analysis for Yanbu National Petrochemical

roce
SASE:2290 Return on Capital Employed July 20th 2021

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.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Yanbu National Petrochemical. About five years ago, returns on capital were 9.3%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these poor fundamentals, the stock has gained a huge 103% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing to note, we've identified 1 warning sign with Yanbu National Petrochemical and understanding it should be part of your investment process.

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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