Today we’ll look at Public Joint Stock Company Aeroflot – Russian Airlines (MCX:AFLT) and reflect on its potential as an investment. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its 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?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Aeroflot – Russian Airlines:
0.12 = RUруб20b ÷ (RUруб317b – RUруб157b) (Based on the trailing twelve months to December 2018.)
Therefore, Aeroflot – Russian Airlines has an ROCE of 12%.
Is Aeroflot – Russian Airlines’s ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Aeroflot – Russian Airlines’s ROCE is around the 15% average reported by the Airlines industry. Setting aside the industry comparison for now, Aeroflot – Russian Airlines’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
As we can see, Aeroflot – Russian Airlines currently has an ROCE of 12%, less than the 34% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Aeroflot – Russian Airlines.
What Are Current Liabilities, And How Do They Affect Aeroflot – Russian Airlines’s ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Aeroflot – Russian Airlines has total assets of RUруб317b and current liabilities of RUруб157b. Therefore its current liabilities are equivalent to approximately 50% of its total assets. Aeroflot – Russian Airlines has a medium level of current liabilities, which would boost its ROCE somewhat.
The Bottom Line On Aeroflot – Russian Airlines’s ROCE
With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. Of course you might be able to find a better stock than Aeroflot – Russian Airlines. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Thank you for reading.