This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Public Joint Stock Company Uralkali (MCX:URKA)’s return fundamentals and stock market performance.
Purchasing Uralkali gives you an ownership stake in the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Thus, to understand how your money can grow by investing in Uralkali, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).
Calculating Return On Capital Employed for URKA
Choosing to invest in Uralkali comes at the cost of investing in another potentially favourable company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. We’ll look at Uralkali’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. URKA’s ROCE is calculated below:
ROCE Calculation for URKA
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$1.08b ÷ (US$8.99b – US$2.36b) = 16.3%
As you can see, URKA earned RUB16.3 from every RUB100 you invested over the previous twelve months. This shows Uralkali provides a favourable return to capital holders, which beats the 15% ROCE that is typically considered to be a strong benchmark. As a result, if URKA is clever with their reinvestments or dividend payments, investors can grow their capital at an attractive rate over time.
A deeper look
The encouraging ROCE is good news for Uralkali investors if the company is able to maintain strong earnings and control their capital needs. But if this doesn’t occur, URKA’s ROCE may deteriorate, in which case your money is better invested elsewhere. Therefore, investors need to be confident in the trend of the inputs in the formula above, so that Uralkali will continue the solid returns. Three years ago, URKA’s ROCE was -7.6%, which means the company’s capital returns have improved. With this, the current earnings of US$1.08b improved from -US$663.2m and capital employed has deteriorated because of a decreased level of total assets and increase in current liabilities (more borrowed money) , which is an indication that Uralkali has increased the ROCE for investors by producing more earnings and using less capital.
URKA’s investors have enjoyed an upward trend in ROCE and it is currently at a level that makes the company an attractive candidate that is capable of producing solid capital returns, and hence, an attractive return on investment. As an investor this is the type of situation you look for, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and management ability. If you don’t pay attention to these factors you cannot be sure if this trend will continue or reverse due to reasons that cannot be seen by looking in the past. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for URKA’s future growth? Take a look at our free research report of analyst consensus for URKA’s outlook.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Uralkali’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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.