Saudi Research and Media Group (TADAWUL:4210) Shareholders Will Want The ROCE Trajectory To Continue

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Saudi Research and Media Group's (TADAWUL:4210) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Saudi Research and Media Group:

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

0.18 = ر.س653m ÷ (ر.س6.4b - ر.س2.7b) (Based on the trailing twelve months to March 2022).

Thus, Saudi Research and Media Group has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Media industry average of 8.2% it's much better.

Check out our latest analysis for Saudi Research and Media Group

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 Saudi Research and Media Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Saudi Research and Media Group Tell Us?

We're delighted to see that Saudi Research and Media Group is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 18% on its capital. Not only that, but the company is utilizing 105% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a separate but related note, it's important to know that Saudi Research and Media Group has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In summary, it's great to see that Saudi Research and Media Group has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 660% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Saudi Research and Media Group can keep these trends up, it could have a bright future ahead.

While Saudi Research and Media Group looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 4210 is currently trading for a fair price.

While Saudi Research and Media Group 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.