Capital Allocation Trends At Ramco Cements (NSE:RAMCOCEM) Aren't Ideal

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 Ramco Cements (NSE:RAMCOCEM) and its ROCE trend, we weren't exactly thrilled.

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

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

0.08 = ₹8.3b ÷ (₹132b - ₹28b) (Based on the trailing twelve months to June 2022).

Thus, Ramco Cements has an ROCE of 8.0%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 10%.

See our latest analysis for Ramco Cements

In the above chart we have measured Ramco Cements' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Ramco Cements' ROCE Trending?

On the surface, the trend of ROCE at Ramco Cements doesn't inspire confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 8.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Ramco Cements' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Ramco Cements. In light of this, the stock has only gained 4.2% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

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

While Ramco 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.

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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.