Will the Promising Trends At Umm Al-Qura Cement (TADAWUL:3005) Continue?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Umm Al-Qura Cement (TADAWUL:3005) and its trend of ROCE, we really liked what we saw.

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. 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)

0.13 = ر.س146m ÷ (ر.س1.3b - ر.س189m) (Based on the trailing twelve months to September 2020).

So, Umm Al-Qura Cement has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Basic Materials industry.

See our latest analysis for Umm Al-Qura Cement

Historical performance is a great place to start when researching a stock so above you can see the gauge for Umm Al-Qura Cement's ROCE against it's prior returns. If you're interested in investigating Umm Al-Qura Cement's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that Umm Al-Qura Cement is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 13% on its capital. In addition to that, Umm Al-Qura Cement is employing 32% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Umm Al-Qura Cement has decreased current liabilities to 14% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On Umm Al-Qura Cement's ROCE

To the delight of most shareholders, Umm Al-Qura Cement has now broken into profitability. Considering the stock has delivered 5.4% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

If you'd like to know about the risks facing Umm Al-Qura Cement, we've discovered 1 warning sign that you should be aware of.

While Umm Al-Qura 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.

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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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