Why The 32% Return On Capital At Hume Cement Industries Berhad (KLSE:HUMEIND) Should Have Your Attention

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Hume Cement Industries Berhad's (KLSE:HUMEIND) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.32 = RM296m ÷ (RM1.2b - RM298m) (Based on the trailing twelve months to June 2024).

So, Hume Cement Industries Berhad has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Basic Materials industry average of 5.5%.

See our latest analysis for Hume Cement Industries Berhad

Above you can see how the current ROCE for Hume Cement Industries Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Hume Cement Industries Berhad .

So How Is Hume Cement Industries Berhad's ROCE Trending?

Hume Cement Industries Berhad has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 32%, which is always encouraging. While returns have increased, the amount of capital employed by Hume Cement Industries Berhad has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

One more thing to note, Hume Cement Industries Berhad has decreased current liabilities to 24% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From Hume Cement Industries Berhad's ROCE

To sum it up, Hume Cement Industries Berhad is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 203% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Hume Cement Industries Berhad can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 2 warning signs for Hume Cement Industries Berhad you'll probably want to know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.