Should We Be Excited About The Trends Of Returns At RussNeft (MCX:RNFT)?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at RussNeft (MCX:RNFT), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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 RussNeft:

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

0.079 = ₽17b ÷ (₽282b - ₽73b) (Based on the trailing twelve months to June 2020).

So, RussNeft has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 4.8% generated by the Oil and Gas industry, it's much better.

See our latest analysis for RussNeft

In the above chart we have measured RussNeft's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for RussNeft.

What The Trend Of ROCE Can Tell Us

In terms of RussNeft's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 7.9% and the business has deployed 79% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, RussNeft has done well to reduce current liabilities to 26% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On RussNeft's ROCE

As we've seen above, RussNeft's returns on capital haven't increased but it is reinvesting in the business. And in the last three years, the stock has given away 59% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think RussNeft has the makings of a multi-bagger.

On a separate note, we've found 1 warning sign for RussNeft you'll probably want to know about.

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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. 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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