These Return Metrics Don't Make Saudi Cement (TADAWUL:3030) Look Too Strong

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Saudi Cement (TADAWUL:3030), we weren't too hopeful.

What is 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)

0.11 = ر.س280m ÷ (ر.س3.5b - ر.س886m) (Based on the trailing twelve months to March 2022).

Thus, Saudi Cement has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Basic Materials industry average of 8.3% it's much better.

View our latest analysis for Saudi Cement

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?

The trend of returns that Saudi Cement is generating are raising some concerns. The company used to generate 24% on its capital five years ago but it has since fallen noticeably. In addition to that, Saudi Cement is now employing 24% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. 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.

In Conclusion...

In summary, it's unfortunate that Saudi Cement is shrinking its capital base and also generating lower returns. However the stock has delivered a 52% return to shareholders over the last five years, so investors might be expecting the trends to turn around. 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.