Return Trends At Udaipur Cement Works (NSE:UDAICEMENT) Aren't Appealing

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Udaipur Cement Works (NSE:UDAICEMENT) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Udaipur Cement Works is:

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

0.06 = ₹1.3b ÷ (₹25b - ₹3.3b) (Based on the trailing twelve months to June 2024).

Thus, Udaipur Cement Works has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 8.9%.

Check out our latest analysis for Udaipur Cement Works

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

What Does the ROCE Trend For Udaipur Cement Works Tell Us?

There are better returns on capital out there than what we're seeing at Udaipur Cement Works. The company has employed 232% more capital in the last five years, and the returns on that capital have remained stable at 6.0%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 13% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

As we've seen above, Udaipur Cement Works' returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 15% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

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

While Udaipur Cement Works 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.

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