The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want a simplistic look at the return on Public Joint Stock Company Acron (MCX:AKRN) stock.
Purchasing Acron gives you an ownership stake in the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. To understand Acron’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.
ROCE: Explanation and Calculation
As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. To determine Acron’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). I have calculated Acron’s ROCE for you below:
ROCE Calculation for AKRN
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = RUруб22b ÷ (RUруб190b – RUруб38b) = 14%
The calculation above shows that AKRN’s earnings were 14% of capital employed. A good ROCE hurdle you should aim for in your investments is 15%, which AKRN has just fallen short of, meaning the company creates an unideal amount of earnings from capital employed.
Then why have investors invested?
Acron’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Acron is in an adverse position, but this can change if these factors improve. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. If you go back three years, you’ll find that AKRN’s ROCE has decreased from 16%. We can see that earnings have actually increased from RUруб391m to RUруб22b but capital employed has increased by a proportionally greater amount because of a smaller reliance on current liabilities (less borrowed money) , which suggests investor’s ROCE has fallen because the company requires more capital to create earnings despite the previous growth in EBT.
AKRN’s investors have experienced a downward trend in ROCE and it is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. However, it is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for AKRN’s future growth? Take a look at our free research report of analyst consensus for AKRN’s outlook.
- Valuation: What is AKRN worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether AKRN is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.