Yakutsk Fuel and Energy (MCX:YAKG) May Have Issues Allocating Its Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Yakutsk Fuel and Energy (MCX:YAKG), it didn't seem to tick all of these boxes.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Yakutsk Fuel and Energy:

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

0.15 = ₽3.0b ÷ (₽23b - ₽2.3b) (Based on the trailing twelve months to December 2020).

Therefore, Yakutsk Fuel and Energy has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 6.9% generated by the Oil and Gas industry.

View our latest analysis for Yakutsk Fuel and Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yakutsk Fuel and Energy's ROCE against it's prior returns. If you'd like to look at how Yakutsk Fuel and Energy has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Yakutsk Fuel and Energy's ROCE Trending?

In terms of Yakutsk Fuel and Energy's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 15% from 25% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Yakutsk Fuel and Energy's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 835% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Yakutsk Fuel and Energy does have some risks, we noticed 4 warning signs (and 2 which are concerning) we think you should know about.

While Yakutsk Fuel and Energy 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.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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