Eastern Province Cement's (TADAWUL:3080) Returns On Capital Not Reflecting Well On The Business

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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 the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Eastern Province Cement (TADAWUL:3080), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Eastern Province Cement is:

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

0.069 = ر.س187m ÷ (ر.س2.9b - ر.س222m) (Based on the trailing twelve months to March 2021).

Thus, Eastern Province Cement has an ROCE of 6.9%. In absolute terms, that's a low return but it's around the Basic Materials industry average of 8.5%.

See our latest analysis for Eastern Province Cement

Historical performance is a great place to start when researching a stock so above you can see the gauge for Eastern Province Cement's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Eastern Province Cement, check out these free graphs here.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Eastern Province Cement. To be more specific, the ROCE was 14% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Eastern Province Cement becoming one if things continue as they have.

The Key Takeaway

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 96% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Eastern Province Cement does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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