Yanbu Cement (TADAWUL:3060) May Have Issues Allocating Its Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Yanbu Cement (TADAWUL:3060), the trends above didn't look too great.

Understanding 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. Analysts use this formula to calculate it for Yanbu Cement:

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

0.085 = ر.س271m ÷ (ر.س3.6b - ر.س350m) (Based on the trailing twelve months to March 2021).

So, Yanbu Cement has an ROCE of 8.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.2%.

See our latest analysis for Yanbu Cement

In the above chart we have measured Yanbu 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 Yanbu Cement.

How Are Returns Trending?

We are a bit anxious about the trends of ROCE at Yanbu Cement. Unfortunately, returns have declined substantially over the last five years to the 8.5% we see today. In addition to that, Yanbu Cement is now employing 23% 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.

Our Take On Yanbu Cement's ROCE

In summary, it's unfortunate that Yanbu Cement is shrinking its capital base and also generating lower returns. However the stock has delivered a 43% 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.

On a separate note, we've found 1 warning sign for Yanbu Cement you'll probably want to know about.

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