Today we are going to look at Public Joint Stock Company Saratov Oil Refinery (MCX:KRKN) to see whether it might be an attractive investment prospect. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Saratov Oil Refinery:
0.17 = ₽5.6b ÷ (₽36b – ₽3.7b) (Based on the trailing twelve months to December 2019.)
So, Saratov Oil Refinery has an ROCE of 17%.
Is Saratov Oil Refinery’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Saratov Oil Refinery’s ROCE is meaningfully higher than the 9.8% average in the Oil and Gas industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Saratov Oil Refinery’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Our data shows that Saratov Oil Refinery currently has an ROCE of 17%, compared to its ROCE of 13% 3 years ago. This makes us think the business might be improving. The image below shows how Saratov Oil Refinery’s ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. We note Saratov Oil Refinery could be considered a cyclical business. If Saratov Oil Refinery is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Saratov Oil Refinery’s Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Saratov Oil Refinery has total assets of ₽36b and current liabilities of ₽3.7b. As a result, its current liabilities are equal to approximately 10% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
What We Can Learn From Saratov Oil Refinery’s ROCE
Overall, Saratov Oil Refinery has a decent ROCE and could be worthy of further research. There might be better investments than Saratov Oil Refinery out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
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This article by Simply Wall St is general in nature. 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. Thank you for reading.