Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we’ll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, National Shipping Company of Saudi Arabia (TADAWUL:4030) we aren’t filled with optimism, but let’s investigate further.

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. Analysts use this formula to calculate it for National Shipping Company of Saudi Arabia:

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

0.038 = ر.س583m ÷ (ر.س22b – ر.س6.8b) (Based on the trailing twelve months to June 2022).

Therefore, National Shipping Company of Saudi Arabia has an ROCE of 3.8%. Ultimately, that’s a low return and it under-performs the Oil and Gas industry average of 8.4%.

Check out our latest analysis for National Shipping Company of Saudi Arabia

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

What Can We Tell From National Shipping Company of Saudi Arabia’s ROCE Trend?

We are a bit worried about the trend of returns on capital at National Shipping Company of Saudi Arabia. To be more specific, the ROCE was 6.9% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it’s a mature business that hasn’t had much growth in the last five years. So because these trends aren’t typically conducive to creating a multi-bagger, we wouldn’t hold our breath on National Shipping Company of Saudi Arabia becoming one if things continue as they have.

On a side note, National Shipping Company of Saudi Arabia’s current liabilities have increased over the last five years to 31% of total assets, effectively distorting the ROCE to some degree. Without this increase, it’s likely that ROCE would be even lower than 3.8%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line On National Shipping Company of Saudi Arabia’s ROCE

All in all, the lower returns from the same amount of capital employed aren’t exactly signs of a compounding machine. Yet despite these concerning fundamentals, the stock has performed strongly with a 43% return over the last five years, so investors appear very optimistic. Regardless, we don’t feel too comfortable with the fundamentals so we’d be steering clear of this stock for now.

If you’d like to know more about National Shipping Company of Saudi Arabia, we’ve spotted 4 warning signs, and 3 of them can’t be ignored.

While National Shipping Company of Saudi Arabia isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.