Investors Will Want Yamama Saudi Cement's (TADAWUL:3020) Growth In ROCE To Persist

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 when we looked at Yamama Saudi Cement (TADAWUL:3020) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Yamama Saudi Cement is:

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

0.059 = ر.س336m ÷ (ر.س6.4b - ر.س713m) (Based on the trailing twelve months to September 2023).

Thus, Yamama Saudi Cement has an ROCE of 5.9%. On its own, that's a low figure but it's around the 5.3% average generated by the Basic Materials industry.

See our latest analysis for Yamama Saudi Cement

In the above chart we have measured Yamama Saudi 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 Yamama Saudi Cement.

How Are Returns Trending?

Shareholders will be relieved that Yamama Saudi Cement has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 5.9% on its capital. While returns have increased, the amount of capital employed by Yamama Saudi Cement has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

In Conclusion...

In summary, we're delighted to see that Yamama Saudi Cement has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 140% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

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 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. 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.