If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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.س618m ÷ (ر.س6.0b - ر.س2.5b) (Based on the trailing twelve months to September 2021).
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 9.3% generated by the Media industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Saudi Research and Media Group's ROCE against it's prior returns. 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.
The Trend Of ROCE
The fact that Saudi Research and Media Group is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 18% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Saudi Research and Media Group is utilizing 92% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
On a side note, Saudi Research and Media Group's current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On Saudi Research and Media Group's ROCE
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 781% 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.
If you want to continue researching Saudi Research and Media Group, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.
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.