Today we’ll evaluate Public Joint-Stock Company PROTEK (MCX:PRTK) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the 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.
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. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.
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 PROTEK:
0.13 = ₽8.3b ÷ (₽143b – ₽81b) (Based on the trailing twelve months to June 2019.)
Therefore, PROTEK has an ROCE of 13%.
Is PROTEK’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that PROTEK’s ROCE is meaningfully better than the 7.9% average in the Healthcare industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from how PROTEK 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.
PROTEK’s current ROCE of 13% is lower than 3 years ago, when the company reported a 23% ROCE. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how PROTEK’s past growth compares to other companies.
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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. How cyclical is PROTEK? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How PROTEK’s Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
PROTEK has current liabilities of ₽81b and total assets of ₽143b. As a result, its current liabilities are equal to approximately 56% of its total assets. PROTEK’s current liabilities are fairly high, making its ROCE look better than otherwise.
The Bottom Line On PROTEK’s ROCE
Despite this, the company also has a uninspiring ROCE, which is not an ideal combination in this analysis. You might be able to find a better investment than PROTEK. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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