Returns On Capital Signal Difficult Times Ahead For Southern Province Cement (TADAWUL:3050)

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Southern Province Cement (TADAWUL:3050), 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 Southern Province Cement, this is the formula:

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

0.16 = ر.س624m ÷ (ر.س4.3b - ر.س430m) (Based on the trailing twelve months to March 2021).

So, Southern Province Cement has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 7.9% generated by the Basic Materials industry.

See our latest analysis for Southern Province Cement

Above you can see how the current ROCE for Southern Province 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

We are a bit worried about the trend of returns on capital at Southern Province Cement. About five years ago, returns on capital were 30%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Southern Province Cement to turn into a multi-bagger.

On a related note, Southern Province Cement has decreased its current liabilities to 9.9% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

In summary, it's unfortunate that Southern Province Cement is generating lower returns from the same amount of capital. However the stock has delivered a 56% 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.

One more thing, we've spotted 1 warning sign facing Southern Province Cement that you might find interesting.

While Southern Province Cement isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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