Saudi Cement (TADAWUL:3030) Could Be At Risk Of Shrinking As A Company

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Saudi Cement (TADAWUL:3030), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Saudi Cement, this is the formula:

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

0.14 = ر.س314m ÷ (ر.س3.4b - ر.س1.1b) (Based on the trailing twelve months to September 2022).

So, Saudi Cement has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Basic Materials industry average of 6.2% it's much better.

Check out the opportunities and risks within the SA Basic Materials industry.

In the above chart we have measured Saudi Cement's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Saudi Cement Tell Us?

We are a bit anxious about the trends of ROCE at Saudi Cement. The company used to generate 19% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 21% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

Our Take On Saudi Cement's ROCE

To see Saudi Cement reducing the capital employed in the business in tandem with diminishing returns, is concerning. Yet despite these concerning fundamentals, the stock has performed strongly with a 73% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Like most companies, Saudi Cement does come with some risks, and we've found 1 warning sign that you should be aware of.

While 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.