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

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Yamama Saudi Cement (TADAWUL:3020) looks quite promising in regards to its trends of return on capital.

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

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)

0.046 = ر.س264m ÷ (ر.س6.5b - ر.س712m) (Based on the trailing twelve months to December 2023).

So, Yamama Saudi Cement has an ROCE of 4.6%. Even though it's in line with the industry average of 4.9%, it's still a low return by itself.

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 analyst report for Yamama Saudi Cement .

What Does the ROCE Trend For Yamama Saudi Cement Tell Us?

Shareholders will be relieved that Yamama Saudi Cement has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.6%, which is always encouraging. While returns have increased, the amount of capital employed by Yamama Saudi Cement has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

In Conclusion...

As discussed above, Yamama Saudi Cement appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 101% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 1 warning sign facing Yamama Saudi Cement that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.