Should You Be Impressed By City Cement's (TADAWUL:3003) Returns on Capital?

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating City Cement (TADAWUL:3003), we don't think it's current trends fit the mold of a multi-bagger.

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

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. The formula for this calculation on City Cement is:

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

0.091 = ر.س220m ÷ (ر.س2.5b - ر.س73m) (Based on the trailing twelve months to September 2020).

Thus, City Cement has an ROCE of 9.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.2%.

View our latest analysis for City Cement

In the above chart we have measured City Cement's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

Over the past five years, City Cement's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect City Cement to be a multi-bagger going forward. On top of that you'll notice that City Cement has been paying out a large portion (91%) of earnings in the form of dividends to shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

What We Can Learn From City Cement's ROCE

We can conclude that in regards to City Cement's returns on capital employed and the trends, there isn't much change to report on. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 101% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

City Cement does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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