Saudi Research and Media Group's (TADAWUL:4210) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So when we looked at Saudi Research and Media Group (TADAWUL:4210) and its trend of ROCE, we really liked what we saw.

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 Media Group, this is the formula:

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

0.18 = ر.س741m ÷ (ر.س6.3b - ر.س2.2b) (Based on the trailing twelve months to March 2023).

So, Saudi Research and Media Group has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 8.0% generated by the Media industry.

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

How Are Returns Trending?

The trends we've noticed at Saudi Research and Media Group are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 36% more capital is being employed now too. So we're very much inspired by what we're seeing at Saudi Research and Media Group thanks to its ability to profitably reinvest capital.

Our Take On Saudi Research and Media Group's ROCE

In summary, it's great to see that Saudi Research and Media Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 118% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

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

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.