Today we are going to look at Public Joint Stock Company Magnitogorsk Iron & Steel Works (MCX:MAGN) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we’ll work out how to calculate ROCE. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
Understanding 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. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Magnitogorsk Iron & Steel Works:
0.31 = US$1.5b ÷ (US$7.6b – US$1.4b) (Based on the trailing twelve months to September 2018.)
Therefore, Magnitogorsk Iron & Steel Works has an ROCE of 31%.
Is Magnitogorsk Iron & Steel Works’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Magnitogorsk Iron & Steel Works’s ROCE is meaningfully higher 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. Putting aside its position relative to its industry for now, in absolute terms, Magnitogorsk Iron & Steel Works’s ROCE is currently very good.
As we can see, Magnitogorsk Iron & Steel Works currently has an ROCE of 31% compared to its ROCE 3 years ago, which was 23%. This makes us think about whether the company has been reinvesting shrewdly.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Given the industry it operates in, Magnitogorsk Iron & Steel Works could be considered cyclical. Since the future is so important for investors, you should check out our free report on analyst forecasts for Magnitogorsk Iron & Steel Works.
What Are Current Liabilities, And How Do They Affect Magnitogorsk Iron & Steel Works’s ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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.
Magnitogorsk Iron & Steel Works has total assets of US$7.6b and current liabilities of US$1.4b. As a result, its current liabilities are equal to approximately 19% of its total assets. The fairly low level of current liabilities won’t have much impact on the already great ROCE.
What We Can Learn From Magnitogorsk Iron & Steel Works’s ROCE
Low current liabilities and high ROCE is a good combination, making Magnitogorsk Iron & Steel Works look quite interesting. 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 firstname.lastname@example.org.