There's Been No Shortage Of Growth Recently For Saudi Kayan Petrochemical's (TADAWUL:2350) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Saudi Kayan Petrochemical (TADAWUL:2350) looks quite promising in regards to its trends of return on capital.

Understanding 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. The formula for this calculation on Saudi Kayan Petrochemical is:

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

0.086 = ر.س2.5b ÷ (ر.س33b - ر.س3.8b) (Based on the trailing twelve months to March 2022).

So, Saudi Kayan Petrochemical has an ROCE of 8.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.9%.

Check out our latest analysis for Saudi Kayan Petrochemical

In the above chart we have measured Saudi Kayan Petrochemical's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Saudi Kayan Petrochemical.

What Does the ROCE Trend For Saudi Kayan Petrochemical Tell Us?

We're pretty happy with how the ROCE has been trending at Saudi Kayan Petrochemical. We found that the returns on capital employed over the last five years have risen by 104%. The company is now earning ر.س0.09 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 23% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Bottom Line

From what we've seen above, Saudi Kayan Petrochemical has managed to increase it's returns on capital all the while reducing it's capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 82% return over the last five years. In light of that, we think it's worth looking further into this stock because if Saudi Kayan Petrochemical can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for Saudi Kayan Petrochemical that we think 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.