The Returns On Capital At Lucky Cement (TPE:1108) Don't Inspire Confidence

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Lucky Cement (TPE:1108), we weren't too hopeful.

What is 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 Lucky Cement is:

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

0.074 = NT$438m ÷ (NT$7.9b - NT$2.0b) (Based on the trailing twelve months to September 2020).

Thus, Lucky Cement has an ROCE of 7.4%. On its own, that's a low figure but it's around the 8.2% average generated by the Basic Materials industry.

See our latest analysis for Lucky Cement

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lucky Cement's ROCE against it's prior returns. If you're interested in investigating Lucky Cement's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Lucky Cement, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 11% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Lucky Cement becoming one if things continue as they have.

What We Can Learn From Lucky Cement's ROCE

In summary, it's unfortunate that Lucky Cement is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 33% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Lucky Cement (of which 1 is potentially serious!) that you should know about.

While Lucky 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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