Returns At India Cements (NSE:INDIACEM) Appear To Be Weighed Down

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating India Cements (NSE:INDIACEM), we don't think it's current trends fit the mold of a multi-bagger.

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

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. Analysts use this formula to calculate it for India Cements:

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

0.065 = ₹5.5b ÷ (₹111b - ₹26b) (Based on the trailing twelve months to June 2021).

Thus, India Cements has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 13%.

View 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 want to delve into the historical earnings, revenue and cash flow of India Cements, check out these free graphs here.

The Trend Of ROCE

Over the past five years, India Cements' ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if India Cements doesn't end up being a multi-bagger in a few years time.

Our Take On India Cements' ROCE

In summary, India Cements isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 49% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we found 3 warning signs for India Cements (1 is concerning) you should be aware of.

While India 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.

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.

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