Today we are going to look at Tattelecom Public Joint-Stock Company (MCX:TTLK) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
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 Tattelecom:
0.10 = ₽1.0b ÷ (₽12b - ₽2.5b) (Based on the trailing twelve months to June 2019.)
So, Tattelecom has an ROCE of 10%.
Does Tattelecom Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Tattelecom's ROCE appears to be around the 10% average of the Telecom industry. Aside from the industry comparison, Tattelecom's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
In our analysis, Tattelecom's ROCE appears to be 10%, compared to 3 years ago, when its ROCE was 6.1%. This makes us wonder if the company is improving. The image below shows how Tattelecom's ROCE compares to its industry.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. If Tattelecom is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Tattelecom's Current Liabilities Impact Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Tattelecom has total liabilities of ₽2.5b and total assets of ₽12b. As a result, its current liabilities are equal to approximately 20% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
Our Take On Tattelecom's ROCE
If Tattelecom continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might also be able to find a better stock than Tattelecom. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Tattelecom better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned.
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