Stock Analysis

Nizhnekamskneftekhim (MCX:NKNC) Will Be Hoping To Turn Its Returns On Capital Around

MISX:NKNC
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Nizhnekamskneftekhim (MCX:NKNC), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for Nizhnekamskneftekhim:

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

0.09 = ₽22b ÷ (₽269b - ₽25b) (Based on the trailing twelve months to December 2020).

So, Nizhnekamskneftekhim has an ROCE of 9.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 17%.

View our latest analysis for Nizhnekamskneftekhim

roce
MISX:NKNC Return on Capital Employed June 18th 2021

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 Nizhnekamskneftekhim, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at Nizhnekamskneftekhim, we didn't gain much confidence. To be more specific, ROCE has fallen from 34% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

What We Can Learn From Nizhnekamskneftekhim's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Nizhnekamskneftekhim have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 165%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Nizhnekamskneftekhim does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

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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About MISX:NKNC

Nizhnekamskneftekhim

Public Joint Stock Company Nizhnekamskneftekhim produces and sells petrochemicals in Russia.

Good value with mediocre balance sheet.

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