Should You Like Interregional Distribution Grid Company of Center and Volga Region, Public Joint Stock Company’s (MCX:MRKP) High Return On Capital Employed?

Today we’ll look at Interregional Distribution Grid Company of Center and Volga Region, Public Joint Stock Company (MCX:MRKP) and reflect on its potential as an investment. 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.

First of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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?

Analysts use this formula to calculate return on capital employed:

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

Or for Interregional Distribution Grid Company of Center and Volga Region:

0.15 = ₽12b ÷ (₽105b – ₽25b) (Based on the trailing twelve months to September 2019.)

Therefore, Interregional Distribution Grid Company of Center and Volga Region has an ROCE of 15%.

Check out our latest analysis for Interregional Distribution Grid Company of Center and Volga Region

Does Interregional Distribution Grid Company of Center and Volga Region Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Interregional Distribution Grid Company of Center and Volga Region’s ROCE appears to be substantially greater than the 8.7% average in the Electric Utilities industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Interregional Distribution Grid Company of Center and Volga Region sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

We can see that, Interregional Distribution Grid Company of Center and Volga Region currently has an ROCE of 15% compared to its ROCE 3 years ago, which was 10%. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Interregional Distribution Grid Company of Center and Volga Region’s ROCE compares to its industry, and you can click it to see more detail on its past growth.

MISX:MRKP Past Revenue and Net Income, March 2nd 2020
MISX:MRKP Past Revenue and Net Income, March 2nd 2020

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Interregional Distribution Grid Company of Center and Volga Region.

How Interregional Distribution Grid Company of Center and Volga Region’s Current Liabilities Impact Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Interregional Distribution Grid Company of Center and Volga Region has current liabilities of ₽25b and total assets of ₽105b. Therefore its current liabilities are equivalent to approximately 24% of its total assets. Low current liabilities are not boosting the ROCE too much.

Our Take On Interregional Distribution Grid Company of Center and Volga Region’s ROCE

This is good to see, and with a sound ROCE, Interregional Distribution Grid Company of Center and Volga Region could be worth a closer look. There might be better investments than Interregional Distribution Grid Company of Center and Volga Region 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.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.