What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Having said that, from a first glance at Saudi Ground Services (TADAWUL:4031) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on Saudi Ground Services is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.089 = ر.س316m ÷ (ر.س4.4b - ر.س796m) (Based on the trailing twelve months to March 2020).
So, Saudi Ground Services has an ROCE of 8.9%. On its own that's a low return, but compared to the average of 5.7% generated by the Infrastructure industry, it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Saudi Ground Services' ROCE against it's prior returns. If you're interested in investigating Saudi Ground Services' past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Saudi Ground Services Tell Us?
In terms of Saudi Ground Services' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 23%, but since then they've fallen to 8.9%. However it looks like Saudi Ground Services might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line
To conclude, we've found that Saudi Ground Services is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 53% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
On a final note, we found 2 warning signs for Saudi Ground Services (1 makes us a bit uncomfortable) you should be aware of.
While Saudi Ground Services 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. 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.
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