Be Wary Of Qatar National Cement Company (Q.P.S.C.) (DSM:QNCD) And Its Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Qatar National Cement Company (Q.P.S.C.) (DSM:QNCD), we weren't too upbeat about how things were going.

What is Return On Capital Employed (ROCE)?

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 Qatar National Cement Company (Q.P.S.C.), this is the formula:

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

0.042 = ر.ق123m ÷ (ر.ق3.2b - ر.ق256m) (Based on the trailing twelve months to June 2020).

So, Qatar National Cement Company (Q.P.S.C.) has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 9.1%.

Check out our latest analysis for Qatar National Cement Company (Q.P.S.C.)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Qatar National Cement Company (Q.P.S.C.)'s ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Qatar National Cement Company (Q.P.S.C.), check out these free graphs here.

What Does the ROCE Trend For Qatar National Cement Company (Q.P.S.C.) Tell Us?

In terms of Qatar National Cement Company (Q.P.S.C.)'s historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 14% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Qatar National Cement Company (Q.P.S.C.) becoming one if things continue as they have.

The Key Takeaway

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 35% 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.

Qatar National Cement Company (Q.P.S.C.) does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Qatar National Cement Company (Q.P.S.C.) 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. 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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