Saudi Vitrified Clay Pipe's (TADAWUL:2360) Returns On Capital Tell Us There Is Reason To Feel Uneasy

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Saudi Vitrified Clay Pipe (TADAWUL:2360), the trends above didn't look too great.

Return On Capital Employed (ROCE): What is it?

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)

0.00036 = ر.س109k ÷ (ر.س313m - ر.س19m) (Based on the trailing twelve months to September 2021).

Therefore, Saudi Vitrified Clay Pipe has an ROCE of 0.04%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 9.4%.

View our latest analysis for Saudi Vitrified Clay Pipe

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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.

What Does the ROCE Trend For Saudi Vitrified Clay Pipe Tell Us?

We are a bit worried about the trend of returns on capital at Saudi Vitrified Clay Pipe. Unfortunately the returns on capital have diminished from the 34% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. 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 6.0% 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 Key Takeaway

In summary, it's unfortunate that Saudi Vitrified Clay Pipe is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 20% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Saudi Vitrified Clay Pipe (of which 1 is a bit concerning!) that you should know about.

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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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.