Returns On Capital Signal Tricky Times Ahead For KuibyshevAzot (MCX:KAZT)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think KuibyshevAzot (MCX:KAZT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on KuibyshevAzot is:

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

0.10 = ₽5.9b ÷ (₽70b - ₽11b) (Based on the trailing twelve months to December 2020).

So, KuibyshevAzot has an ROCE of 10.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 22%.

View our latest analysis for KuibyshevAzot

Historical performance is a great place to start when researching a stock so above you can see the gauge for KuibyshevAzot's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of KuibyshevAzot, check out these free graphs here.

What Does the ROCE Trend For KuibyshevAzot 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 10.0% 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.

Our Take On KuibyshevAzot's ROCE

In summary, KuibyshevAzot is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 447% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing KuibyshevAzot we've found 4 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While KuibyshevAzot 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.