The Trends At Deccan Cements (NSE:DECCANCE) That You Should Know About

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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. To calculate this metric for Deccan Cements, this is the formula:

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

0.099 = ₹563m ÷ (₹7.1b - ₹1.4b) (Based on the trailing twelve months to June 2020).

Thus, Deccan Cements has an ROCE of 9.9%. Even though it's in line with the industry average of 9.9%, it's still a low return by itself.

View 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'd like to look at how Deccan Cements has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Deccan Cements' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.9% from 15% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

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 38% 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.

Like most companies, Deccan Cements does come with some risks, and we've found 2 warning signs that you should be aware of.

While Deccan Cements isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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