Saudi Top for Trading (TADAWUL:9552) May Have Issues Allocating Its Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Saudi Top for Trading (TADAWUL:9552) we aren't filled with optimism, but let's investigate further.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Saudi Top for Trading is:

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

0.074 = ر.س6.0m ÷ (ر.س141m - ر.س60m) (Based on the trailing twelve months to June 2024).

Thus, Saudi Top for Trading has an ROCE of 7.4%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.1%.

See our latest analysis for Saudi Top for Trading

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'd like to look at how Saudi Top for Trading has performed in the past in other metrics, you can view this free graph of Saudi Top for Trading's past earnings, revenue and cash flow.

What Does the ROCE Trend For Saudi Top for Trading Tell Us?

There is reason to be cautious about Saudi Top for Trading, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 16% that they were earning one year ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Top for Trading becoming one if things continue as they have.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 42%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From Saudi Top for Trading's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 13% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing to note, we've identified 5 warning signs with Saudi Top for Trading and understanding them should be part of your investment process.

While Saudi Top for Trading 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.