Sahara International Petrochemical (TADAWUL:2310) Knows How To Allocate Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Sahara International Petrochemical (TADAWUL:2310) looks great, so lets see what the trend can tell us.

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 Sahara International Petrochemical, this is the formula:

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

0.21 = ر.س4.9b ÷ (ر.س25b - ر.س2.7b) (Based on the trailing twelve months to September 2022).

Therefore, Sahara International Petrochemical has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 11%.

View our latest analysis for Sahara International Petrochemical

Above you can see how the current ROCE for Sahara International Petrochemical compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sahara International Petrochemical here for free.

How Are Returns Trending?

We like the trends that we're seeing from Sahara International Petrochemical. The data shows that returns on capital have increased substantially over the last five years to 21%. Basically the business is earning more per dollar of capital invested and in addition to that, 56% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Sahara International Petrochemical's ROCE

To sum it up, Sahara International Petrochemical has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 156% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Sahara International Petrochemical does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

Sahara International Petrochemical is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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

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.