If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at Arabian Pipes' (TADAWUL:2200) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Arabian Pipes, this is the formula:

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

0.40 = ر.س176m ÷ (ر.س1.0b - ر.س574m) (Based on the trailing twelve months to December 2024).

So, Arabian Pipes has an ROCE of 40%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 12%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Arabian Pipes' ROCE against it's prior returns.

The Trend Of ROCE

We're pretty happy with how the ROCE has been trending at Arabian Pipes. The figures show that over the last five years, returns on capital have grown by 243%. The company is now earning ر.س0.4 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 21% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

Another thing to note, Arabian Pipes has a high ratio of current liabilities to total assets of 57%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Arabian Pipes' ROCE

From what we've seen above, Arabian Pipes has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a staggering 203% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Arabian Pipes does come with some risks, and we've found 2 warning signs that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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.