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If you’re looking at a mature business that’s past the growth phase, what are some of the underlying trends that pop up? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Kakatiya Cement Sugar and Industries (NSE:KAKATCEM), the trends above didn’t look too great.
Understanding 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. To calculate this metric for Kakatiya Cement Sugar and Industries, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.082 = ₹201m ÷ (₹3.1b – ₹669m) (Based on the trailing twelve months to March 2022).
So, Kakatiya Cement Sugar and Industries has an ROCE of 8.2%. On its own, that’s a low figure but it’s around the 9.8% average generated by the Basic Materials industry.
View our latest analysis for Kakatiya Cement Sugar and Industries
Historical performance is a great place to start when researching a stock so above you can see the gauge for Kakatiya Cement Sugar and Industries’ ROCE against it’s prior returns. If you’d like to look at how Kakatiya Cement Sugar and Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
In terms of Kakatiya Cement Sugar and Industries’ historical ROCE movements, the trend doesn’t inspire confidence. About five years ago, returns on capital were 17%, however they’re now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it’s a mature business that hasn’t had much growth in the last five years. So because these trends aren’t typically conducive to creating a multi-bagger, we wouldn’t hold our breath on Kakatiya Cement Sugar and Industries becoming one if things continue as they have.
The Bottom Line On Kakatiya Cement Sugar and Industries’ ROCE
In the end, the trend of lower returns on the same amount of capital isn’t typically an indication that we’re looking at a growth stock. Long term shareholders who’ve owned the stock over the last five years have experienced a 49% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren’t great in these areas, we’d consider looking elsewhere.
If you want to know some of the risks facing Kakatiya Cement Sugar and Industries we’ve found 4 warning signs (1 can’t be ignored!) that you should be aware of before investing here.
While Kakatiya Cement Sugar and Industries 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.
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