Will Chelyabinsk plant of the profiled steel decking (MCX:PRFN) Multiply In Value Going Forward?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Chelyabinsk plant of the profiled steel decking (MCX:PRFN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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. To calculate this metric for Chelyabinsk plant of the profiled steel decking, this is the formula:

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

0.016 = ₽187m ÷ (₽13b - ₽1.3b) (Based on the trailing twelve months to June 2020).

Thus, Chelyabinsk plant of the profiled steel decking has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 9.5%.

See our latest analysis for Chelyabinsk plant of the profiled steel decking

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'd like to look at how Chelyabinsk plant of the profiled steel decking has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Chelyabinsk plant of the profiled steel decking's ROCE Trending?

On the surface, the trend of ROCE at Chelyabinsk plant of the profiled steel decking doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.6% from 13% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Chelyabinsk plant of the profiled steel decking has done well to pay down its current liabilities to 10% of total assets. Since the ratio used to be 61%, that's a significant reduction and it no doubt explains the drop in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Chelyabinsk plant of the profiled steel decking is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 221% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing: We've identified 4 warning signs with Chelyabinsk plant of the profiled steel decking (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

While Chelyabinsk plant of the profiled steel decking 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.

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