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. 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. However, after briefly looking over the numbers, we don't think Yamama Saudi Cement (TADAWUL:3020) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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)

0.024 = ر.س130m ÷ (ر.س6.0b - ر.س469m) (Based on the trailing twelve months to June 2022).

Thus, Yamama Saudi Cement has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 6.0%.

Our analysis indicates that 3020 is potentially undervalued!

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

On the surface, the trend of ROCE at Yamama Saudi Cement doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.4% from 5.4% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Yamama Saudi Cement's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Yamama Saudi Cement have fallen, meanwhile the business is employing more capital than it was five years ago. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 88% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

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.

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.