Returns On Capital - An Important Metric For Cemat (CPH:CEMAT)

If you're looking for a multi-bagger, there's a few things to 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Cemat (CPH:CEMAT) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Cemat:

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

0.027 = kr.3.7m ÷ (kr.146m - kr.6.0m) (Based on the trailing twelve months to June 2020).

Thus, Cemat has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Integrated Utilities industry average of 4.8%.

View our latest analysis for Cemat

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Cemat, check out these free graphs here.

How Are Returns Trending?

We're delighted to see that Cemat is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Cemat is using 59% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Cemat could be selling under-performing assets since the ROCE is improving.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 4.1%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Cemat's ROCE

In a nutshell, we're pleased to see that Cemat has been able to generate higher returns from less capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 48% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 3 warning signs facing Cemat that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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