How Has Al Jouf Cement (TADAWUL:3091) Allocated Its Capital?

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Al Jouf Cement (TADAWUL:3091), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Al Jouf Cement, this is the formula:

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

0.02 = ر.س43m ÷ (ر.س2.4b - ر.س201m) (Based on the trailing twelve months to September 2020).

So, Al Jouf Cement has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 9.2%.

See our latest analysis for Al Jouf Cement

Above you can see how the current ROCE for Al Jouf 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.

How Are Returns Trending?

In terms of Al Jouf Cement's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 4.5% that they were earning five years ago. 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. If these trends continue, we wouldn't expect Al Jouf Cement to turn into a multi-bagger.

The Bottom Line

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. Yet despite these concerning fundamentals, the stock has performed strongly with a 51% 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.

Like most companies, Al Jouf Cement does come with some risks, and we've found 2 warning signs that you should be aware of.

While Al Jouf 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.

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