Returns Are Gaining Momentum At Umm Al-Qura Cement (TADAWUL:3005)

Simply Wall St
May 24, 2021
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Umm Al-Qura Cement (TADAWUL:3005) looks quite promising in regards to its trends of return on capital.

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 Umm Al-Qura Cement, this is the formula:

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

0.12 = ر.س137m ÷ (ر.س1.3b - ر.س179m) (Based on the trailing twelve months to March 2021).

Therefore, Umm Al-Qura Cement has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Basic Materials industry average of 8.5% it's much better.

See our latest analysis for Umm Al-Qura Cement

SASE:3005 Return on Capital Employed May 25th 2021

In the above chart we have measured Umm Al-Qura Cement's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Umm Al-Qura Cement here for free.

What Can We Tell From Umm Al-Qura Cement's ROCE Trend?

We're delighted to see that Umm Al-Qura Cement is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 12%, which is always encouraging. While returns have increased, the amount of capital employed by Umm Al-Qura Cement has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line On Umm Al-Qura Cement's ROCE

To sum it up, Umm Al-Qura Cement is collecting higher returns from the same amount of capital, and that's impressive. And with a respectable 44% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Umm Al-Qura Cement, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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