Stock Analysis

Returns On Capital At Gazprom (MCX:GAZP) Paint An Interesting Picture

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MISX:GAZP
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Gazprom (MCX:GAZP) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Gazprom:

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).

Thus, 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 4.8%.

See our latest analysis for Gazprom

roce
MISX:GAZP Return on Capital Employed January 19th 2021

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'd like, you can check out the forecasts from the analysts covering Gazprom here for free.

So How Is Gazprom's ROCE Trending?

In terms of Gazprom's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.4% over the last five years. 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.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Gazprom have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 139% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Gazprom does have some risks though, and we've spotted 3 warning signs for Gazprom that you might be interested in.

While Gazprom 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.

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