Capital Allocation Trends At Arabian Cement (TADAWUL:3010) Aren't Ideal

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Arabian Cement (TADAWUL:3010), 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 Arabian Cement:

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

0.083 = ر.س282m ÷ (ر.س3.7b - ر.س274m) (Based on the trailing twelve months to June 2021).

Thus, Arabian Cement has an ROCE of 8.3%. Even though it's in line with the industry average of 8.5%, it's still a low return by itself.

See our latest analysis for Arabian Cement

In the above chart we have measured Arabian 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 Arabian Cement here for free.

What Does the ROCE Trend For Arabian Cement Tell Us?

There is reason to be cautious about Arabian Cement, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 17% 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Arabian Cement becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Arabian Cement is generating lower returns from the same amount of capital. However the stock has delivered a 53% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

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

While Arabian 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. 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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