Investors Could Be Concerned With KuibyshevAzot's (MCX:KAZT) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at KuibyshevAzot (MCX:KAZT), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on KuibyshevAzot is:

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

0.083 = ₽4.8b ÷ (₽68b - ₽9.9b) (Based on the trailing twelve months to September 2020).

Therefore, KuibyshevAzot has an ROCE of 8.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 24%.

See our latest analysis for KuibyshevAzot

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of KuibyshevAzot, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of KuibyshevAzot's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.3% from 24% five years ago. 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.

The Bottom Line

In summary, we're somewhat concerned by KuibyshevAzot's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 186% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we've found 2 warning signs for KuibyshevAzot that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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