Is Urals Stampings Plant PAO (MCX:URKZ) Creating Value For Shareholders?

Today we’ll look at Urals Stampings Plant PAO (MCX:URKZ) and reflect on its potential as an investment. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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’.

How Do You Calculate Return On Capital Employed?

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 Urals Stampings Plant PAO:

0.11 = ₽3.6b ÷ (₽36b – ₽3.3b) (Based on the trailing twelve months to December 2019.)

So, Urals Stampings Plant PAO has an ROCE of 11%.

View our latest analysis for Urals Stampings Plant PAO

Does Urals Stampings Plant PAO Have A Good ROCE?

One way to assess ROCE is to compare similar companies. We can see Urals Stampings Plant PAO’s ROCE is around the 12% average reported by the Metals and Mining industry. Separate from how Urals Stampings Plant PAO stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

In our analysis, Urals Stampings Plant PAO’s ROCE appears to be 11%, compared to 3 years ago, when its ROCE was 0.1%. This makes us wonder if the company is improving. The image below shows how Urals Stampings Plant PAO’s ROCE compares to its industry, and you can click it to see more detail on its past growth.

MISX:URKZ Past Revenue and Net Income, March 3rd 2020
MISX:URKZ Past Revenue and Net Income, March 3rd 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Given the industry it operates in, Urals Stampings Plant PAO could be considered cyclical. If Urals Stampings Plant PAO is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Urals Stampings Plant PAO’s Current Liabilities And Their Impact On 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Urals Stampings Plant PAO has current liabilities of ₽3.3b and total assets of ₽36b. Therefore its current liabilities are equivalent to approximately 9.3% of its total assets. With low levels of current liabilities, at least Urals Stampings Plant PAO’s mediocre ROCE is not unduly boosted.

The Bottom Line On Urals Stampings Plant PAO’s ROCE

If performance improves, then Urals Stampings Plant PAO may be an OK investment, especially at the right valuation. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.