What Do The Returns On Capital At Saudi Industrial Services (TADAWUL:2190) Tell Us?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Saudi Industrial Services (TADAWUL:2190), it didn't seem to tick all of these boxes.

Understanding 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. The formula for this calculation on Saudi Industrial Services is:

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

0.047 = ر.س180m ÷ (ر.س4.3b - ر.س443m) (Based on the trailing twelve months to September 2020).

Thus, Saudi Industrial Services has an ROCE of 4.7%. Even though it's in line with the industry average of 4.8%, it's still a low return by itself.

View our latest analysis for Saudi Industrial Services

Above you can see how the current ROCE for Saudi Industrial Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Saudi Industrial Services.

So How Is Saudi Industrial Services' ROCE Trending?

In terms of Saudi Industrial Services' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.4%, but since then they've fallen to 4.7%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Saudi Industrial Services' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Saudi Industrial Services. And long term investors must be optimistic going forward because the stock has returned a huge 181% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One final note, you should learn about the 2 warning signs we've spotted with Saudi Industrial Services (including 1 which is shouldn't be ignored) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

When trading Saudi Industrial Services or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.