Today we’ll evaluate Public Joint-Stock Company Ukrtelecom (FRA:UK1) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. 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. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 Ukrtelecom:
0.10 = ₴898m ÷ (₴12b – ₴3.2b) (Based on the trailing twelve months to December 2017.)
So, Ukrtelecom has an ROCE of 10%.
Is Ukrtelecom’s ROCE Good?
One way to assess ROCE is to compare similar companies. It appears that Ukrtelecom’s ROCE is fairly close to the Telecom industry average of 8.5%. Separate from Ukrtelecom’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Ukrtelecom’s current ROCE of 10% is lower than 3 years ago, when the company reported a 17% ROCE. So investors might consider if it has had issues recently.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. If Ukrtelecom is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Ukrtelecom’s ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Ukrtelecom has total liabilities of ₴3.2b and total assets of ₴12b. Therefore its current liabilities are equivalent to approximately 26% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On Ukrtelecom’s ROCE
This is good to see, and with a sound ROCE, Ukrtelecom could be worth a closer look. There might be better investments than Ukrtelecom 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.
I will like Ukrtelecom better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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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. Thank you for reading.