Should You Be Worried About Arabian Cement's (TADAWUL:3010) Returns On Capital?

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Arabian Cement (TADAWUL:3010), so let's see why.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Arabian Cement, this is the formula:

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

0.073 = ر.س239m ÷ (ر.س3.6b - ر.س274m) (Based on the trailing twelve months to September 2020).

Thus, Arabian Cement has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 9.2%.

Check out 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 to see what analysts are forecasting going forward, you should check out our free report for Arabian Cement.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Arabian Cement. Unfortunately the returns on capital have diminished from the 19% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Arabian Cement becoming one if things continue as they have.

What We Can Learn From Arabian Cement's ROCE

In summary, it's unfortunate that Arabian Cement is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 34% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we've found 2 warning signs for Arabian Cement that we think you should be aware of.

While Arabian Cement isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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