PJSC Tatneft (MCX:TATN) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 PJSC Tatneft (MCX:TATN) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for PJSC Tatneft:

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

0.14 = ₽139b ÷ (₽1.3t - ₽292b) (Based on the trailing twelve months to December 2020).

Thus, PJSC Tatneft has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Oil and Gas industry.

See our latest analysis for PJSC Tatneft

Above you can see how the current ROCE for PJSC Tatneft compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for PJSC Tatneft.

The Trend Of ROCE

In terms of PJSC Tatneft's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 19%, but since then they've fallen to 14%. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 23%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 14%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From PJSC Tatneft's ROCE

We're a bit apprehensive about PJSC Tatneft because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these poor fundamentals, the stock has gained a huge 135% 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.

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

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