If we want to find a title that could multiply over the long term, what are the underlying trends to look for? A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in line with growth amount capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. With that in mind, we’ve noticed some promising trends at Saudi Arabia Mining Company (Ma’aden) (TADAWUL: 1211) so let’s look a little deeper.
Return on capital employed (ROCE): what is it?
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. The formula for this calculation on the Saudi Arabian Mining Company (Ma’aden) is as follows:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.063 = ر.س 5.6 b ÷ (ر.س 100 b – ر.س 11 b) (Based on the last twelve months up to September 2021).
Thereby, The Saudi Arabian Mining Company (Ma’aden) has a ROCE of 6.3%. At the end of the day, that’s a low yield and it’s below the 11% average for the metals and mining industry.
See our latest analysis for Saudi Arabian Mining Company (Ma’aden)
In the graph above, we measured the past ROCE of the Saudi Arabian Mining Company (Ma’aden) against its past performance, but the future is arguably more important. If you want, you can check the analysts’ forecasts for the Saudi Arabian Mining Company (Ma’aden) here for free.
What the ROCE trend can tell us
The growth in ROCE of the Saudi Arabian Mining Company (Ma’aden) is quite impressive. Looking at the data, we can see that although the capital employed in the company has remained relatively stable, the ROCE generated has increased by 374% over the past five years. Basically, the business generates higher returns from the same amount of capital and this is proof that there are improvements in the efficiency of the business. On this front, things are looking good, so it’s worth exploring what management has said about growth plans for the future.
Our opinion on the ROCE of the Saudi Arabian Mining Company (Ma’aden)
As noted above, the Saudi Arabian Mining Company (Ma’aden) appears to be becoming increasingly efficient at generating returns as capital employed has remained stable but profits (before interest and taxes) are rising. And as the stock has performed exceptionally well over the past five years, these trends are being taken into account by investors. That being said, we still believe that promising fundamentals mean the company deserves additional due diligence.
Like most companies, the Saudi Arabian Mining Company (Ma’aden) carries certain risks, and we have found 2 warning signs that you need to be aware of.
If you want to look for solid businesses with great income, check out this free list of companies with good balance sheets and impressive returns on equity.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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