Returns On Capital At Qassim Cement (TADAWUL:3040) Paint A Concerning Picture

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Qassim Cement (TADAWUL:3040), so let's see why.

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. 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)

0.21 = ر.س397m ÷ (ر.س2.1b - ر.س231m) (Based on the trailing twelve months to March 2021).

So, Qassim Cement has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Basic Materials industry average of 8.5%.

View 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 to see what analysts are forecasting going forward, you should check out our free report for Qassim Cement.

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 30% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Qassim Cement to turn into a multi-bagger.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. However the stock has delivered a 83% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

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

Qassim Cement is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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