Is There More Growth In Store For Cementos Molins' (BDM:CMO) Returns On Capital?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Cementos Molins (BDM:CMO) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Cementos Molins is:

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

0.056 = €66m ÷ (€1.4b - €195m) (Based on the trailing twelve months to September 2020).

So, Cementos Molins has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 7.9%.

Check out our latest analysis for Cementos Molins

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cementos Molins' ROCE against it's prior returns. If you're interested in investigating Cementos Molins' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Cementos Molins has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 185% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

What We Can Learn From Cementos Molins' ROCE

To bring it all together, Cementos Molins has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 62% return over the last five years. In light of that, we think it's worth looking further into this stock because if Cementos Molins can keep these trends up, it could have a bright future ahead.

While Cementos Molins looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether CMO is currently trading for a fair price.

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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