If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Hume Cement Industries Berhad (KLSE:HUMEIND) and its ROCE trend, we weren’t exactly thrilled.
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. To calculate this metric for Hume Cement Industries Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.037 = RM27m ÷ (RM1.3b – RM580m) (Based on the trailing twelve months to June 2022).
Thus, Hume Cement Industries Berhad has an ROCE of 3.7%. In absolute terms, that’s a low return, but it’s much better than the Basic Materials industry average of 2.4%.
See our latest analysis for Hume Cement Industries Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hume Cement Industries Berhad’s ROCE against it’s prior returns. If you’re interested in investigating Hume Cement Industries Berhad’s past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Hume Cement Industries Berhad Tell Us?
We’ve noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 28% in that same period. To us that doesn’t look like a multi-bagger because the company appears to be selling assets and it’s returns aren’t increasing. In addition to that, since the ROCE doesn’t scream “quality” at 3.7%, it’s hard to get excited about these developments.
On a side note, Hume Cement Industries Berhad’s current liabilities are still rather high at 45% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On Hume Cement Industries Berhad’s ROCE
It’s a shame to see that Hume Cement Industries Berhad is effectively shrinking in terms of its capital base. And in the last five years, the stock has given away 59% so the market doesn’t look too hopeful on these trends strengthening any time soon. In any case, the stock doesn’t have these traits of a multi-bagger discussed above, so if that’s what you’re looking for, we think you’d have more luck elsewhere.
On a final note, we’ve found 1 warning sign for Hume Cement Industries Berhad that we think you should be aware of.
While Hume Cement Industries Berhad 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.
Valuation is complex, but we’re helping make it simple.
Find out whether Hume Cement Industries Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
View the Free Analysis
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.