Returns On Capital Signal Tricky Times Ahead For Ramco Cements (NSE:RAMCOCEM)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Ramco Cements (NSE:RAMCOCEM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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 Ramco Cements is:

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

0.072 = ₹8.9b ÷ (₹163b - ₹40b) (Based on the trailing twelve months to June 2024).

So, Ramco Cements has an ROCE of 7.2%. On its own, that's a low figure but it's around the 8.5% average generated by the Basic Materials industry.

See 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, you can check out the forecasts from the analysts covering Ramco Cements for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Ramco Cements, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 7.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

In summary, Ramco Cements is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 22% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Ramco Cements does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.