Our Take On The Returns On Capital At Chelyabinsk Forge-and-Press Plant (MCX:CHKZ)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Looking at Chelyabinsk Forge-and-Press Plant (MCX:CHKZ), it does have a high ROCE right now, but lets see how returns are trending.

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. The formula for this calculation on Chelyabinsk Forge-and-Press Plant is:

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

0.20 = ₽970m ÷ (₽12b - ₽7.0b) (Based on the trailing twelve months to September 2020).

Therefore, Chelyabinsk Forge-and-Press Plant has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Auto Components industry average of 6.2%.

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

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chelyabinsk Forge-and-Press Plant's ROCE against it's prior returns. If you're interested in investigating Chelyabinsk Forge-and-Press Plant's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Chelyabinsk Forge-and-Press Plant doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 29%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 59%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

What We Can Learn From Chelyabinsk Forge-and-Press Plant's ROCE

Bringing it all together, while we're somewhat encouraged by Chelyabinsk Forge-and-Press Plant's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 314% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing Chelyabinsk Forge-and-Press Plant we've found 3 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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