Mangalam Cement's (NSE:MANGLMCEM) Returns On Capital Are Heading Higher

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. With that in mind, we've noticed some promising trends at Mangalam Cement (NSE:MANGLMCEM) so let's look a bit deeper.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Mangalam Cement is:

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

0.15 = ₹1.7b ÷ (₹17b - ₹5.5b) (Based on the trailing twelve months to March 2021).

Thus, Mangalam Cement has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 14% generated by the Basic Materials industry.

View our latest analysis for Mangalam Cement

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mangalam Cement's ROCE against it's prior returns. If you're interested in investigating Mangalam Cement's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Mangalam Cement's ROCE Trend?

The fact that Mangalam Cement is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 15% on its capital. And unsurprisingly, like most companies trying to break into the black, Mangalam Cement is utilizing 20% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Key Takeaway

In summary, it's great to see that Mangalam Cement has managed to break into profitability and is continuing to reinvest in its business. Considering the stock has delivered 34% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing, we've spotted 1 warning sign facing Mangalam Cement that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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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