What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Gazprom (MCX:GAZP) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Gazprom is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.022 = ₽450b ÷ (₽22t - ₽2.3t) (Based on the trailing twelve months to September 2020).
So, Gazprom has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 7.1%.
Above you can see how the current ROCE for Gazprom compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Gazprom's ROCE Trending?
In terms of Gazprom's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.4%, but since then they've fallen to 2.2%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
In summary, we're somewhat concerned by Gazprom's diminishing returns on increasing amounts of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 100% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
One more thing to note, we've identified 2 warning signs with Gazprom and understanding them should be part of your investment process.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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Public Joint Stock Company Gazprom, an integrated energy company, engages in the geological exploration, production, processing, storage, transportation, and sale of gas, gas condensates, and oil in Russia and internationally.
Excellent balance sheet with solid track record and pays a dividend.