Investors Could Be Concerned With Oil Company Bashneft's (MCX:BANE) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Oil Company Bashneft (MCX:BANE), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Oil Company Bashneft:

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

0.06 = ₽44b ÷ (₽845b - ₽109b) (Based on the trailing twelve months to June 2021).

Thus, Oil Company Bashneft has an ROCE of 6.0%. On its own, that's a low figure but it's around the 6.9% average generated by the Oil and Gas industry.

Check out our latest analysis for Oil Company Bashneft

Above you can see how the current ROCE for Oil Company Bashneft compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Oil Company Bashneft here for free.

What Does the ROCE Trend For Oil Company Bashneft Tell Us?

On the surface, the trend of ROCE at Oil Company Bashneft doesn't inspire confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 6.0%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Oil Company Bashneft's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Oil Company Bashneft have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 44% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Oil Company Bashneft does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While Oil Company Bashneft may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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