Should You Be Impressed By Deccan Cements' (NSE:DECCANCE) Returns on Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Deccan Cements (NSE:DECCANCE), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Deccan Cements is:

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

0.14 = ₹907m ÷ (₹7.9b - ₹1.7b) (Based on the trailing twelve months to September 2020).

So, Deccan Cements has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Basic Materials industry average of 11% it's much better.

See our latest analysis for Deccan Cements

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

What Can We Tell From Deccan Cements' ROCE Trend?

On the surface, the trend of ROCE at Deccan Cements doesn't inspire confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 14%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

We're a bit apprehensive about Deccan Cements because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Despite the concerning underlying trends, the stock has actually gained 3.9% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing, we've spotted 3 warning signs facing Deccan Cements 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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