Stock Analysis

The Returns On Capital At Yanbu Cement (TADAWUL:3060) Don't Inspire Confidence

SASE:3060
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When researching a stock for investment, what can tell us that the company is in decline? 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. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Yanbu Cement (TADAWUL:3060), we weren't too upbeat about how things were going.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Yanbu Cement is:

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

0.062 = ر.س188m ÷ (ر.س3.4b - ر.س424m) (Based on the trailing twelve months to September 2022).

Therefore, Yanbu Cement has an ROCE of 6.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.2%.

See our latest analysis for Yanbu Cement

roce
SASE:3060 Return on Capital Employed December 30th 2022

Above you can see how the current ROCE for Yanbu Cement compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Yanbu Cement.

What Does the ROCE Trend For Yanbu Cement Tell Us?

We are a bit worried about the trend of returns on capital at Yanbu Cement. Unfortunately the returns on capital have diminished from the 8.8% 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. If these trends continue, we wouldn't expect Yanbu Cement to turn into a multi-bagger.

Our Take On Yanbu Cement's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these concerning fundamentals, the stock has performed strongly with a 43% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know about the risks facing Yanbu Cement, we've discovered 2 warning signs that you should be aware of.

While Yanbu 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.

Valuation is complex, but we're helping make it simple.

Find out whether Yanbu Cement is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.