CEMATRIX (TSE:CEMX) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at CEMATRIX (TSE:CEMX) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on CEMATRIX is:

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

0.041 = CA$1.6m ÷ (CA$42m - CA$4.0m) (Based on the trailing twelve months to September 2024).

Thus, CEMATRIX has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 13%.

View our latest analysis for CEMATRIX

Above you can see how the current ROCE for CEMATRIX compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for CEMATRIX .

What Can We Tell From CEMATRIX's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 5.8% five years ago, while the business's capital employed increased by 155%. That being said, CEMATRIX raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence CEMATRIX might not have received a full period of earnings contribution from it.

On a side note, CEMATRIX has done well to pay down its current liabilities to 9.5% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On CEMATRIX's ROCE

To conclude, we've found that CEMATRIX is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 31% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think CEMATRIX has the makings of a multi-bagger.

On a separate note, we've found 2 warning signs for CEMATRIX you'll probably want to know about.

While CEMATRIX 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. 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.