Is Saudi Paper Manufacturing (TADAWUL:2300) A Future Multi-bagger?

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Saudi Paper Manufacturing (TADAWUL:2300) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Saudi Paper Manufacturing is:

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

0.093 = ر.س46m ÷ (ر.س897m - ر.س404m) (Based on the trailing twelve months to September 2020).

Thus, Saudi Paper Manufacturing has an ROCE of 9.3%. In absolute terms, that's a low return, but it's much better than the Forestry industry average of 7.4%.

See our latest analysis for Saudi Paper Manufacturing

Above you can see how the current ROCE for Saudi Paper Manufacturing 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 Saudi Paper Manufacturing.

How Are Returns Trending?

Like most people, we're pleased that Saudi Paper Manufacturing is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 9.3% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 53% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.

On a separate but related note, it's important to know that Saudi Paper Manufacturing has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

From what we've seen above, Saudi Paper Manufacturing has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a solid 66% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Saudi Paper Manufacturing can keep these trends up, it could have a bright future ahead.

On a final note, we found 2 warning signs for Saudi Paper Manufacturing (1 makes us a bit uncomfortable) you should be aware of.

While Saudi Paper Manufacturing isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

If you’re looking to trade Saudi Paper Manufacturing, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.