Returns On Capital At Riyadh Cement (TADAWUL:9512) Have Stalled

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Riyadh Cement (TADAWUL:9512), we don't think it's current trends fit the mold of a multi-bagger.

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 Riyadh Cement, this is the formula:

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

0.12 = ر.س201m ÷ (ر.س1.9b - ر.س183m) (Based on the trailing twelve months to December 2022).

Therefore, Riyadh Cement has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Basic Materials industry average of 6.5% it's much better.

Check out our latest analysis for Riyadh Cement

Above you can see how the current ROCE for Riyadh 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.

SWOT Analysis for Riyadh Cement

How Are Returns Trending?

Things have been pretty stable at Riyadh Cement, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Riyadh Cement to be a multi-bagger going forward.

The Key Takeaway

In summary, Riyadh Cement isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 15% over the last year, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 1 warning sign for Riyadh Cement that we think you should be aware of.

While Riyadh 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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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.