There Are Reasons To Feel Uneasy About Riyadh Steel's (TADAWUL:9588) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. However, after investigating Riyadh Steel (TADAWUL:9588), we don't think it's current trends fit the mold of a multi-bagger.

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Understanding Return On Capital Employed (ROCE)

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 Riyadh Steel:

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

0.043 = ر.س4.1m ÷ (ر.س105m - ر.س11m) (Based on the trailing twelve months to December 2024).

So, Riyadh Steel has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 19%.

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

What Does the ROCE Trend For Riyadh Steel Tell Us?

On the surface, the trend of ROCE at Riyadh Steel doesn't inspire confidence. Around four years ago the returns on capital were 6.3%, but since then they've fallen to 4.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Riyadh Steel has done well to pay down its current liabilities to 10% of total assets. So we could link some of this to the decrease in ROCE. 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 Bottom Line On Riyadh Steel's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Riyadh Steel. These growth trends haven't led to growth returns though, since the stock has fallen 22% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 3 warning signs we've spotted with Riyadh Steel (including 1 which is significant) .

While Riyadh Steel 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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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.