ITD Cementation India's (NSE:ITDCEM) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. 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 ITD Cementation India (NSE:ITDCEM) and its ROCE trend, we weren't exactly thrilled.

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 ITD Cementation India:

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

0.18 = ₹2.2b ÷ (₹34b - ₹21b) (Based on the trailing twelve months to December 2021).

So, ITD Cementation India has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 10% it's much better.

Check out our latest analysis for ITD Cementation India

In the above chart we have measured ITD Cementation India's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for ITD Cementation India.

The Trend Of ROCE

When we looked at the ROCE trend at ITD Cementation India, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 18% from 38% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, ITD Cementation India has a high ratio of current liabilities to total assets of 63%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From ITD Cementation India's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that ITD Cementation India is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 60% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

ITD Cementation India could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

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. 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.