Saudi Kayan Petrochemical (TADAWUL:2350) Will Be Hoping To Turn Its Returns On Capital Around

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Saudi Kayan Petrochemical (TADAWUL:2350), we've spotted some signs that it could be struggling, so let's investigate.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Saudi Kayan Petrochemical:

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

0.016 = ر.س395m ÷ (ر.س31b - ر.س5.2b) (Based on the trailing twelve months to September 2022).

Thus, Saudi Kayan Petrochemical has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 9.8%.

See our latest analysis for Saudi Kayan Petrochemical

Above you can see how the current ROCE for Saudi Kayan 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 Saudi Kayan Petrochemical here for free.

So How Is Saudi Kayan Petrochemical's ROCE Trending?

We are a bit anxious about the trends of ROCE at Saudi Kayan Petrochemical. Unfortunately, returns have declined substantially over the last five years to the 1.6% we see today. On top of that, the business is utilizing 33% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

Our Take On Saudi Kayan Petrochemical's ROCE

To see Saudi Kayan Petrochemical reducing the capital employed in the business in tandem with diminishing returns, is concerning. Despite the concerning underlying trends, the stock has actually gained 20% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Like most companies, Saudi Kayan Petrochemical does come with some risks, and we've found 1 warning sign that you should be aware of.

While Saudi Kayan Petrochemical 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.