Some Investors May Be Worried About 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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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.

What Is 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)

0.057 = ₹611m ÷ (₹14b - ₹2.9b) (Based on the trailing twelve months to December 2023).

Thus, Deccan Cements has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 9.8%.

See our latest analysis for Deccan Cements

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Deccan Cements' past further, check out this free graph covering Deccan Cements' past earnings, revenue and cash flow.

So How Is Deccan Cements' ROCE Trending?

On the surface, the trend of ROCE at Deccan Cements doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 5.7%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Deccan Cements' ROCE

Bringing it all together, while we're somewhat encouraged by Deccan Cements' reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 35% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Deccan Cements (including 1 which can't be ignored) .

While Deccan Cements may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.