When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within ALROSA (MCX:ALRS), we weren't too hopeful.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for ALROSA, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = ₽68b ÷ (₽556b - ₽123b) (Based on the trailing twelve months to March 2021).
Thus, ALROSA has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Metals and Mining industry.
In the above chart we have measured ALROSA's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
There is reason to be cautious about ALROSA, given the returns are trending downwards. To be more specific, the ROCE was 28% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect ALROSA to turn into a multi-bagger.
Our Take On ALROSA's ROCE
In summary, it's unfortunate that ALROSA is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 177%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for ALROSA (of which 1 is concerning!) that you should know about.
While ALROSA 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.
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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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