India Cements' (NSE:INDIACEM) Returns On Capital Not Reflecting Well On The Business

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at India Cements (NSE:INDIACEM) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for India Cements, this is the formula:

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

0.052 = ₹4.5b ÷ (₹115b - ₹28b) (Based on the trailing twelve months to December 2020).

So, India Cements has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 14%.

Check out our latest analysis for India Cements

Historical performance is a great place to start when researching a stock so above you can see the gauge for India Cements' ROCE against it's prior returns. If you'd like to look at how India Cements has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From India Cements' ROCE Trend?

On the surface, the trend of ROCE at India Cements doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.2% from 7.8% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

What We Can Learn From India Cements' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for India Cements have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these poor fundamentals, the stock has gained a huge 117% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

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

While India 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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