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Today we’ll evaluate Public Joint Stock Company Saratov Oil Refinery (MCX:KRKN) to determine whether it could have potential as an investment idea. 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. Then we’ll compare its ROCE to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Saratov Oil Refinery:
0.20 = RUруб6.1b ÷ (RUруб36b – RUруб4.9b) (Based on the trailing twelve months to March 2019.)
So, Saratov Oil Refinery has an ROCE of 20%.
View our latest analysis for Saratov Oil Refinery
Is Saratov Oil Refinery’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Saratov Oil Refinery’s ROCE is meaningfully better than the 14% average in the Oil and Gas 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. Separate from Saratov Oil Refinery’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. We note Saratov Oil Refinery could be considered a cyclical business. If Saratov Oil Refinery is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do Saratov Oil Refinery’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Saratov Oil Refinery has total assets of RUруб36b and current liabilities of RUруб4.9b. Therefore its current liabilities are equivalent to approximately 14% of its total assets. Low current liabilities are not boosting the ROCE too much.
What We Can Learn From Saratov Oil Refinery’s ROCE
This is good to see, and with a sound ROCE, Saratov Oil Refinery could be worth a closer look. Saratov Oil Refinery looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.