Qassim Cement (TADAWUL:3040) Will Be Looking To Turn Around Its Returns

What underlying fundamental trends can indicate that a company might be 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Qassim Cement (TADAWUL:3040), we've spotted some signs that it could be struggling, so let's investigate.

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 Qassim Cement, this is the formula:

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

0.19 = ر.س355m ÷ (ر.س2.1b - ر.س244m) (Based on the trailing twelve months to September 2021).

So, Qassim Cement has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Basic Materials industry average of 9.4% it's much better.

See our latest analysis for Qassim Cement

In the above chart we have measured Qassim 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 Qassim Cement here for free.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Qassim Cement. Unfortunately the returns on capital have diminished from the 26% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Qassim Cement becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Qassim Cement is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 53% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Qassim Cement does have some risks though, and we've spotted 1 warning sign for Qassim Cement that you might be interested in.

While Qassim 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.