# Should You Like Public Joint Stock Company Multisistema’s (MCX:MSST) High Return On Capital Employed?

Today we’ll look at Public Joint Stock Company Multisistema (MCX:MSST) and reflect on its potential as an investment. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.

### Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its 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.’

### How Do You Calculate Return On Capital Employed?

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 Multisistema:

0.81 = RUруб73m ÷ (RUруб1.5b – RUруб1.2b) (Based on the trailing twelve months to June 2018.)

So, Multisistema has an ROCE of 81%.

### Is Multisistema’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Multisistema’s ROCE is meaningfully higher than the 11% average in the Commercial Services industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Putting aside its position relative to its industry for now, in absolute terms, Multisistema’s ROCE is currently very good.

As we can see, Multisistema currently has an ROCE of 81% compared to its ROCE 3 years ago, which was 19%. This makes us wonder if the company is improving.

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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. You can check if Multisistema has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

### Do Multisistema’s Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Multisistema has total assets of RUруб1.5b and current liabilities of RUруб1.2b. As a result, its current liabilities are equal to approximately 82% of its total assets. Multisistema boasts an attractive ROCE, even after considering the boost from high current liabilities.

### Our Take On Multisistema’s ROCE

So we would be interested in doing more research here — there may be an opportunity! But note: Multisistema may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.