Today we’ll look at Public Joint Stock Company “Ashinskiy metallurgical works” (MCX:AMEZ) and reflect on its potential as an investment. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Ashinskiy metallurgical works:
0.14 = RUруб1.8b ÷ (RUруб17b – RUруб4.3b) (Based on the trailing twelve months to June 2018.)
Therefore, Ashinskiy metallurgical works has an ROCE of 14%.
Is Ashinskiy metallurgical works’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Ashinskiy metallurgical works’s ROCE is meaningfully better than the 8.1% average in the Metals and Mining industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the industry comparison for now, Ashinskiy metallurgical works’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
As we can see, Ashinskiy metallurgical works currently has an ROCE of 14% compared to its ROCE 3 years ago, which was 9.0%. This makes us think the business might be improving.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. We note Ashinskiy metallurgical works could be considered a cyclical business. How cyclical is Ashinskiy metallurgical works? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Ashinskiy metallurgical works’s Current Liabilities And Their Impact On Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Ashinskiy metallurgical works has total assets of RUруб17b and current liabilities of RUруб4.3b. Therefore its current liabilities are equivalent to approximately 26% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
What We Can Learn From Ashinskiy metallurgical works’s ROCE
That said, Ashinskiy metallurgical works’s ROCE is mediocre, there may be more attractive investments around. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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 email@example.com.