These back measures don’t make Saudi Cement (TADAWUL:3030) look too strong

What underlying fundamental trends can indicate that a business might be in decline? Companies in decline often have two underlying trends, first, a decline to return to on capital employed (ROCE) and a decrease base capital employed. Basically, the company earns less on its investments and it also reduces its total assets. So after taking a look at the trends inside Saudi cement (TADAWUL:3030), we weren’t too optimistic.

What is return on capital employed (ROCE)?

For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. To calculate this metric for Saudi Cement, here is the formula:

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

0.11 = ر.س280m ÷ (ر.س3.5b – ر.س886m) (Based on the last twelve months to March 2022).

Thereby, Saudi Cement posted a ROCE of 11%. In absolute terms, that’s a decent return, but compared to the base materials industry average of 8.3%, it’s much better.

Check out our latest analysis for Saudi Cement

SASE:3030 Return on Capital Employed May 9, 2022

In the chart above, we measured Saudi Cement’s past ROCE against its past performance, but the future is arguably more important. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.

What does the Saudi cement ROCE trend tell us?

The trend of returns generated by Saudi Cement raises some concerns. The company generated 24% of its capital five years ago but it has since fallen significantly. On top of that, Saudi Cement now employs 24% less capital than five years ago. The fact that both are declining is an indication that the company is going through tough times. Generally, companies with these characteristics are not the ones that tend to multiply over the long term, because statistically speaking, they have already gone through the growth phase of their life cycle.

In conclusion…

In summary, it is unfortunate that Saudi Cement is reducing its capital base and also generating lower returns. However, the stock has generated a 52% return for shareholders over the past five years, so investors might expect the tide to turn. Either way, we don’t feel too comfortable with the fundamentals, so we’d avoid this stock for now.

Like most businesses, Saudi Cement involves certain risks, and we have seen 1 warning sign of which you should be aware.

Although Saudi Cement does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. look at this free list here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.