Investors Could Be Concerned With Ambuja Cements' (NSE:AMBUJACEM) 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? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Ambuja Cements (NSE:AMBUJACEM) and its ROCE trend, we weren't exactly thrilled.

What Is 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 Ambuja Cements is:

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

0.059 = ₹37b ÷ (₹766b - ₹133b) (Based on the trailing twelve months to December 2024).

So, Ambuja Cements has an ROCE of 5.9%. In absolute terms, that's a low return but it's around the Basic Materials industry average of 6.9%.

Check out 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Ambuja Cements .

What Can We Tell From Ambuja Cements' ROCE Trend?

We weren't thrilled with the trend because Ambuja Cements' ROCE has reduced by 48% over the last five years, while the business employed 107% more capital. That being said, Ambuja Cements raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Ambuja Cements probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Ambuja Cements' reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 154% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing to note, we've identified 2 warning signs with Ambuja Cements and understanding them should be part of your investment process.

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.