What Hume Cement Industries Berhad's (KLSE:HUMEIND) Returns On Capital Can Tell Us

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Hume Cement Industries Berhad (KLSE:HUMEIND), the trends above didn't look too great.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Hume Cement Industries Berhad, this is the formula:

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

0.014 = RM11m ÷ (RM1.3b - RM459m) (Based on the trailing twelve months to December 2020).

Therefore, Hume Cement Industries Berhad has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 9.2%.

View our latest analysis for Hume Cement Industries Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hume Cement Industries Berhad's ROCE against it's prior returns. If you're interested in investigating Hume Cement Industries Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Hume Cement Industries Berhad's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 12% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hume Cement Industries Berhad becoming one if things continue as they have.

The Bottom Line On Hume Cement Industries Berhad's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 62% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 1 warning sign for Hume Cement Industries Berhad that we think you should be aware of.

While Hume Cement Industries Berhad 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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