What Can The Trends At Saudi Research and Marketing Group (TADAWUL:4210) Tell Us About Their Returns?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Saudi Research and Marketing Group's (TADAWUL:4210) returns on capital, so let's have a look.

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 Saudi Research and Marketing Group, this is the formula:

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

0.09 = ر.س337m ÷ (ر.س5.5b - ر.س1.8b) (Based on the trailing twelve months to September 2020).

Therefore, Saudi Research and Marketing Group has an ROCE of 9.0%. In absolute terms, that's a low return but it's around the Media industry average of 7.7%.

View our latest analysis for Saudi Research and Marketing Group

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

What The Trend Of ROCE Can Tell Us

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 9.0%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 67%. So we're very much inspired by what we're seeing at Saudi Research and Marketing Group thanks to its ability to profitably reinvest capital.

The Bottom Line On Saudi Research and Marketing Group's ROCE

All in all, it's terrific to see that Saudi Research and Marketing Group is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 73% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Saudi Research and Marketing Group can keep these trends up, it could have a bright future ahead.

Saudi Research and Marketing Group does have some risks though, and we've spotted 1 warning sign for Saudi Research and Marketing Group that you might be interested in.

While Saudi Research and Marketing Group 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. 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.
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