Yamama Saudi Cement (TADAWUL:3020) Is Reinvesting At Lower Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Yamama Saudi Cement (TADAWUL:3020), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.05 = ر.س279m ÷ (ر.س6.0b - ر.س339m) (Based on the trailing twelve months to June 2021).

So, Yamama Saudi Cement has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 8.6%.

View 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, 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?

When we looked at the ROCE trend at Yamama Saudi Cement, we didn't gain much confidence. To be more specific, ROCE has fallen from 16% over the last five years. However it looks like Yamama Saudi Cement might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Yamama Saudi Cement's ROCE

To conclude, we've found that Yamama Saudi Cement is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 47% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you're still interested in Yamama Saudi Cement it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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.

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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.
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