We Like These Underlying Return On Capital Trends At Yamama Saudi Cement (TADAWUL:3020)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. So when we looked at Yamama Saudi Cement (TADAWUL:3020) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.072 = ر.س412m ÷ (ر.س6.3b - ر.س629m) (Based on the trailing twelve months to June 2023).

Therefore, Yamama Saudi Cement has an ROCE of 7.2%. Even though it's in line with the industry average of 6.7%, it's still a low return by itself.

See 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?

Yamama Saudi Cement has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 806% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On Yamama Saudi Cement's ROCE

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. Since the stock has returned a staggering 163% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

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

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.