Tabuk Cement (TADAWUL:3090) Has Some Difficulty Using Its Capital Effectively

When researching a stock for investment, what can tell us that the company is in decline? 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 to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Tabuk Cement (TADAWUL:3090), so let's see why.

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. To calculate this metric for Tabuk Cement, this is the formula:

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

0.029 = ر.س44m ÷ (ر.س1.8b - ر.س262m) (Based on the trailing twelve months to March 2021).

So, Tabuk Cement has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 7.9%.

Check out our latest analysis for Tabuk Cement

Above you can see how the current ROCE for Tabuk Cement compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Tabuk Cement here for free.

How Are Returns Trending?

There is reason to be cautious about Tabuk Cement, given the returns are trending downwards. About five years ago, returns on capital were 4.8%, 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 Tabuk Cement to turn into a multi-bagger.

What We Can Learn From Tabuk Cement's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 38% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Tabuk Cement does have some risks though, and we've spotted 2 warning signs for Tabuk Cement that you might be interested in.

While Tabuk 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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