Public Joint-Stock Company Ukrtelecom’s (FRA:UK1) Investment Returns Are Lagging Its Industry

Today we’ll evaluate Public Joint-Stock Company Ukrtelecom (FRA:UK1) to determine whether it could have potential as an investment idea. 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 up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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 Ukrtelecom:

0.043 = ₴423m ÷ (₴12b – ₴2.0b) (Based on the trailing twelve months to December 2018.)

So, Ukrtelecom has an ROCE of 4.3%.

View our latest analysis for Ukrtelecom

Does Ukrtelecom Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Ukrtelecom’s ROCE appears meaningfully below the 5.9% average reported by the Telecom industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Ukrtelecom stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.

Ukrtelecom’s current ROCE of 4.3% is lower than 3 years ago, when the company reported a 11% ROCE. This makes us wonder if the business is facing new challenges.

DB:UK1 Past Revenue and Net Income, August 21st 2019
DB:UK1 Past Revenue and Net Income, August 21st 2019

It is important to remember that ROCE shows past performance, and is 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. If Ukrtelecom is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Ukrtelecom’s Current Liabilities And Their Impact On 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 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Ukrtelecom has total liabilities of ₴2.0b and total assets of ₴12b. Therefore its current liabilities are equivalent to approximately 17% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

Our Take On Ukrtelecom’s ROCE

That said, Ukrtelecom’s ROCE is mediocre, there may be more attractive investments around. You might be able to find a better investment than Ukrtelecom. 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.

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.

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. Thank you for reading.