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

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Yanbu National Petrochemical (TADAWUL:2290), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Yanbu National Petrochemical is:

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

0.01 = ر.س133m ÷ (ر.س15b - ر.س1.8b) (Based on the trailing twelve months to June 2024).

Thus, Yanbu National Petrochemical has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.1%.

See our latest analysis for Yanbu National Petrochemical

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 analyst report for Yanbu National Petrochemical .

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

The trend of returns that Yanbu National Petrochemical is generating are raising some concerns. To be more specific, today's ROCE was 9.7% five years ago but has since fallen to 1.0%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 23% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. 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

In summary, it's unfortunate that Yanbu National Petrochemical is shrinking its capital base and also generating lower returns. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look 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.

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.

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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.