Kakatiya Cement Sugar and Industries (NSE:KAKATCEM) Will Be Hoping To Turn Its Returns On Capital Around

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Kakatiya Cement Sugar and Industries (NSE:KAKATCEM), we weren't too upbeat about how things were going.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Kakatiya Cement Sugar and Industries, this is the formula:

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

0.095 = ₹231m ÷ (₹3.0b - ₹577m) (Based on the trailing twelve months to December 2021).

Thus, Kakatiya Cement Sugar and Industries has an ROCE of 9.5%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 13%.

Check out our latest analysis for Kakatiya Cement Sugar and Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kakatiya Cement Sugar and Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Kakatiya Cement Sugar and Industries, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Kakatiya Cement Sugar and Industries' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 15% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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.

Our Take On Kakatiya Cement Sugar and Industries' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 30% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Kakatiya Cement Sugar and Industries (of which 1 can't be ignored!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.