Is This A Sign of Things To Come At Saudi Vitrified Clay Pipe (TADAWUL:2360)?

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Saudi Vitrified Clay Pipe (TADAWUL:2360), we've spotted some signs that it could be struggling, so let's investigate.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Saudi Vitrified Clay Pipe is:

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

0.043 = ر.س13m ÷ (ر.س321m - ر.س20m) (Based on the trailing twelve months to December 2020).

So, Saudi Vitrified Clay Pipe has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 9.6%.

View our latest analysis for Saudi Vitrified Clay Pipe

Historical performance is a great place to start when researching a stock so above you can see the gauge for Saudi Vitrified Clay Pipe's ROCE against it's prior returns. If you're interested in investigating Saudi Vitrified Clay Pipe's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Saudi Vitrified Clay Pipe. To be more specific, the ROCE was 45% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Saudi Vitrified Clay Pipe becoming one if things continue as they have.

On a related note, Saudi Vitrified Clay Pipe has decreased its current liabilities to 6.3% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Saudi Vitrified Clay Pipe's ROCE

In summary, it's unfortunate that Saudi Vitrified Clay Pipe is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 40% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Saudi Vitrified Clay Pipe, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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