Stock Analysis

What Do The Returns On Capital At Rostelecom (MCX:RTKM) Tell Us?

MISX:RTKM
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Rostelecom (MCX:RTKM) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Rostelecom:

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

0.056 = ₽42b ÷ (₽942b - ₽202b) (Based on the trailing twelve months to September 2020).

Thus, Rostelecom has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Telecom industry average of 11%.

See our latest analysis for Rostelecom

roce
MISX:RTKM Return on Capital Employed December 2nd 2020

In the above chart we have measured Rostelecom's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Rostelecom.

How Are Returns Trending?

We weren't thrilled with the trend because Rostelecom's ROCE has reduced by 40% over the last five years, while the business employed 85% more capital. Usually this isn't ideal, but given Rostelecom conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Rostelecom probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Rostelecom is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 53% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to know some of the risks facing Rostelecom we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Rostelecom isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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About MISX:RTKM

Rostelecom

Public Joint Stock Company Rostelecom provides digital services and solutions in Russia.

Undervalued with moderate growth potential.

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