Investors Met With Slowing Returns on Capital At Saudi Automotive Services (TADAWUL:4050)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Saudi Automotive Services (TADAWUL:4050), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Saudi Automotive Services is:

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

0.025 = ر.س121m ÷ (ر.س6.1b - ر.س1.4b) (Based on the trailing twelve months to March 2023).

Thus, Saudi Automotive Services has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 19%.

See our latest analysis for Saudi Automotive Services

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

What Can We Tell From Saudi Automotive Services' ROCE Trend?

In terms of Saudi Automotive Services' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 2.5% for the last five years, and the capital employed within the business has risen 287% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Saudi Automotive Services' ROCE

As we've seen above, Saudi Automotive Services' returns on capital haven't increased but it is reinvesting in the business. Yet to long term shareholders the stock has gifted them an incredible 377% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we found 4 warning signs for Saudi Automotive Services (1 shouldn't be ignored) you should be aware of.

While Saudi Automotive Services 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. 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.