Returns On Capital Are Showing Encouraging Signs At Saudi Automotive Services (TADAWUL:4050)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Automotive Services' (TADAWUL:4050) 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. Analysts use this formula to calculate it for Saudi Automotive Services:

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

0.047 = ر.س210m ÷ (ر.س5.8b - ر.س1.4b) (Based on the trailing twelve months to September 2023).

Thus, Saudi Automotive Services has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 16%.

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

What Does the ROCE Trend For Saudi Automotive Services Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 4.7%. Basically the business is earning more per dollar of capital invested and in addition to that, 290% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Saudi Automotive Services has. And a remarkable 269% total return over the last five years tells us that investors are expecting more good things to come in the future. 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 Automotive Services does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.

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.