Chelyabinsk Forge-and-Press Plant (MCX:CHKZ) Knows How To Allocate Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Chelyabinsk Forge-and-Press Plant's (MCX:CHKZ) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Chelyabinsk Forge-and-Press Plant:

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

0.28 = ₽1.0b ÷ (₽12b - ₽8.5b) (Based on the trailing twelve months to December 2020).

Thus, Chelyabinsk Forge-and-Press Plant has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 7.4% earned by companies in a similar industry.

View our latest analysis for Chelyabinsk Forge-and-Press Plant

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Chelyabinsk Forge-and-Press Plant has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Chelyabinsk Forge-and-Press Plant's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 114% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 70% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

Our Take On Chelyabinsk Forge-and-Press Plant's ROCE

To sum it up, Chelyabinsk Forge-and-Press Plant is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing: We've identified 2 warning signs with Chelyabinsk Forge-and-Press Plant (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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