Here’s why CEMEX, S.A.B. de C.V.’s (BMV:CEMEXCPO) Returns On Capital Matters So Much

Today we’ll look at CEMEX, S.A.B. de C.V. (BMV:CEMEXCPO) and reflect on its potential as an investment. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

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

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for CEMEX. de:

0.057 = US$1.3b ÷ (US$29b – US$5.2b) (Based on the trailing twelve months to September 2019.)

Therefore, CEMEX. de has an ROCE of 5.7%.

Check out our latest analysis for CEMEX. de

Is CEMEX. de’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, CEMEX. de’s ROCE appears to be significantly below the 7.6% average in the Basic Materials industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside CEMEX. de’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.

You can click on the image below to see (in greater detail) how CEMEX. de’s past growth compares to other companies.

BMV:CEMEX CPO Past Revenue and Net Income, January 22nd 2020
BMV:CEMEX CPO Past Revenue and Net Income, January 22nd 2020

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for CEMEX. de.

Do CEMEX. de’s Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

CEMEX. de has total assets of US$29b and current liabilities of US$5.2b. As a result, its current liabilities are equal to approximately 18% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

What We Can Learn From CEMEX. de’s ROCE

While that is good to see, CEMEX. de has a low ROCE and does not look attractive in this analysis. You might be able to find a better investment than CEMEX. de. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.