Riyadh Steel (TADAWUL:9588) Might Have The Makings Of A Multi-Bagger

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Riyadh Steel (TADAWUL:9588) so let's look a bit deeper.

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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. To calculate this metric for Riyadh Steel, this is the formula:

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

0.11 = ر.س11m ÷ (ر.س126m - ر.س26m) (Based on the trailing twelve months to December 2023).

Therefore, Riyadh Steel has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Metals and Mining industry average it falls behind.

Check out our latest analysis for Riyadh Steel

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 Riyadh Steel's past further, check out this free graph covering Riyadh Steel's past earnings, revenue and cash flow.

What Does the ROCE Trend For Riyadh Steel Tell Us?

The trends we've noticed at Riyadh Steel are quite reassuring. The data shows that returns on capital have increased substantially over the last three years to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 81% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

All in all, it's terrific to see that Riyadh Steel is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 30% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Riyadh Steel does have some risks, we noticed 4 warning signs (and 3 which can't be ignored) we think 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.