Ambuja Cements (NSE:AMBUJACEM) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Ambuja Cements (NSE:AMBUJACEM) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Ambuja Cements, this is the formula:

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

0.082 = ₹43b ÷ (₹653b - ₹121b) (Based on the trailing twelve months to June 2024).

So, Ambuja Cements has an ROCE of 8.2%. On its own, that's a low figure but it's around the 8.5% average generated by the Basic Materials industry.

View our latest analysis for Ambuja Cements

Above you can see how the current ROCE for Ambuja Cements 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 Ambuja Cements .

What Does the ROCE Trend For Ambuja Cements Tell Us?

The trend of ROCE doesn't look fantastic because it's fallen from 10% five years ago, while the business's capital employed increased by 81%. Usually this isn't ideal, but given Ambuja Cements conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Ambuja Cements might not have received a full period of earnings contribution from it.

The Bottom Line On Ambuja Cements' ROCE

To conclude, we've found that Ambuja Cements is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 226% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 2 warning signs facing Ambuja Cements that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.