Investors Could Be Concerned With Group Five Pipe Saudi's (TADAWUL:9523) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Group Five Pipe Saudi (TADAWUL:9523), we weren't too upbeat about how things were going.

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Return On Capital Employed (ROCE): What Is It?

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 Group Five Pipe Saudi:

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

0.11 = ر.س47m ÷ (ر.س1.2b - ر.س786m) (Based on the trailing twelve months to June 2024).

Therefore, Group Five Pipe Saudi has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 12% generated by the Metals and Mining industry.

Check out our latest analysis for Group Five Pipe Saudi

Historical performance is a great place to start when researching a stock so above you can see the gauge for Group Five Pipe Saudi's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Group Five Pipe Saudi .

What Can We Tell From Group Five Pipe Saudi's ROCE Trend?

The trend of ROCE at Group Five Pipe Saudi is showing some signs of weakness. The company used to generate 16% on its capital four years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 24% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

Another thing to note, Group Five Pipe Saudi has a high ratio of current liabilities to total assets of 65%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Despite the concerning underlying trends, the stock has actually gained 0.7% over the last three years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing: We've identified 4 warning signs with Group Five Pipe Saudi (at least 2 which are concerning) , and understanding these would certainly be useful.

While Group Five Pipe Saudi 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.