Universal Cement (TWSE:1104) Is Experiencing Growth In Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Universal Cement (TWSE:1104) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Universal Cement:

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

0.041 = NT$1.0b ÷ (NT$29b - NT$3.6b) (Based on the trailing twelve months to March 2024).

So, Universal Cement has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 8.0%.

Check out our latest analysis for Universal Cement

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

What Does the ROCE Trend For Universal Cement Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 4.1%. The amount of capital employed has increased too, by 27%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

To sum it up, Universal Cement has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 118% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Universal Cement can keep these trends up, it could have a bright future ahead.

Universal Cement does have some risks though, and we've spotted 1 warning sign for Universal Cement that you might be interested in.

While Universal 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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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.

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