What These Trends Mean At Saudi Vitrified Clay Pipe (TADAWUL:2360)

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Saudi Vitrified Clay Pipe (TADAWUL:2360), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Saudi Vitrified Clay Pipe:

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

0.055 = ر.س18m ÷ (ر.س336m - ر.س19m) (Based on the trailing twelve months to September 2020).

Thus, Saudi Vitrified Clay Pipe has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 9.1%.

See 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.

The Trend Of ROCE

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 42% 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. 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. If these trends continue, we wouldn't expect Saudi Vitrified Clay Pipe to turn into a multi-bagger.

On a side note, Saudi Vitrified Clay Pipe has done well to pay down its current liabilities to 5.7% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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. It should come as no surprise then that the stock has fallen 11% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Saudi Vitrified Clay Pipe does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Saudi Vitrified Clay Pipe isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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