Investors Could Be Concerned With Ramco Cements' (NSE:RAMCOCEM) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Ramco Cements (NSE:RAMCOCEM), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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 Ramco Cements is:

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

0.06 = ₹6.9b ÷ (₹146b - ₹31b) (Based on the trailing twelve months to June 2023).

Therefore, Ramco Cements has an ROCE of 6.0%. On its own, that's a low figure but it's around the 6.7% average generated by the Basic Materials industry.

View our latest analysis for Ramco Cements

Above you can see how the current ROCE for Ramco Cements compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Ramco Cements.

What Does the ROCE Trend For Ramco Cements Tell Us?

On the surface, the trend of ROCE at Ramco Cements doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 6.0%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

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. These trends are starting to be recognized by investors since the stock has delivered a 36% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a final note, we found 2 warning signs for Ramco Cements (1 doesn't sit too well with us) you should be aware of.

While Ramco Cements isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.