Kakatiya Cement Sugar and Industries (NSE:KAKATCEM) Has Some Difficulty Using Its Capital Effectively

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at Kakatiya Cement Sugar and Industries (NSE:KAKATCEM), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Kakatiya Cement Sugar and Industries is:

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

0.042 = ₹102m ÷ (₹3.1b - ₹669m) (Based on the trailing twelve months to June 2022).

So, Kakatiya Cement Sugar and Industries has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 10%.

See our latest analysis for Kakatiya Cement Sugar and Industries

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'd like to look at how Kakatiya Cement Sugar and Industries 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 Kakatiya Cement Sugar and Industries' ROCE Trend?

There is reason to be cautious about Kakatiya Cement Sugar and Industries, given the returns are trending downwards. About five years ago, returns on capital were 17%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Kakatiya Cement Sugar and Industries becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Kakatiya Cement Sugar and Industries is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 38% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Kakatiya Cement Sugar and Industries does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those can't be ignored...

While Kakatiya Cement Sugar and Industries 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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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.