These Return Metrics Don't Make Hail Cement (TADAWUL:3001) Look Too Strong

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. In light of that, from a first glance at Hail Cement (TADAWUL:3001), we've spotted some signs that it could be struggling, so let's investigate.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Hail Cement:

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

0.078 = ر.س93m ÷ (ر.س1.2b - ر.س54m) (Based on the trailing twelve months to June 2021).

So, Hail Cement has an ROCE of 7.8%. On its own, that's a low figure but it's around the 9.0% average generated by the Basic Materials industry.

See our latest analysis for Hail Cement

Above you can see how the current ROCE for Hail Cement compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hail Cement here for free.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Hail Cement. Unfortunately the returns on capital have diminished from the 9.8% 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. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hail Cement becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Hail Cement is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 64% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 2 warning signs facing Hail Cement that you might find interesting.

While Hail Cement 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.

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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