Saudi Paper Manufacturing (TADAWUL:2300) Shareholders Will Want The ROCE Trajectory To Continue

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Saudi Paper Manufacturing's (TADAWUL:2300) returns on capital, so let's have a look.

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 Saudi Paper Manufacturing, this is the formula:

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

0.10 = ر.س71m ÷ (ر.س1.1b - ر.س394m) (Based on the trailing twelve months to June 2023).

So, Saudi Paper Manufacturing has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 7.7% generated by the Forestry industry.

Check out 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Saudi Paper Manufacturing's ROCE Trending?

We're delighted to see that Saudi Paper Manufacturing is reaping rewards from its investments and has now broken into profitability. The company now earns 10% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Our Take On Saudi Paper Manufacturing's ROCE

In summary, we're delighted to see that Saudi Paper Manufacturing has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 186% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

One more thing to note, we've identified 3 warning signs with Saudi Paper Manufacturing and understanding them should be part of your investment process.

While Saudi Paper Manufacturing may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.