Investors Met With Slowing Returns on Capital At Yamama Saudi Cement (TADAWUL:3020)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Yamama Saudi Cement (TADAWUL:3020) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. Analysts use this formula to calculate it for Yamama Saudi Cement:

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

0.034 = ر.س187m ÷ (ر.س6.2b - ر.س766m) (Based on the trailing twelve months to September 2022).

Thus, Yamama Saudi Cement has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 6.2%.

View our latest analysis for Yamama Saudi Cement

Above you can see how the current ROCE for Yamama Saudi Cement compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Yamama Saudi Cement here for free.

What Can We Tell From Yamama Saudi Cement's ROCE Trend?

In terms of Yamama Saudi Cement's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 3.4% and the business has deployed 36% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

In conclusion, Yamama Saudi Cement has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 80% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Yamama Saudi Cement does have some risks though, and we've spotted 1 warning sign for Yamama Saudi Cement that you might be interested in.

While Yamama Saudi 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.