Some Investors May Be Worried About Federal Grid Company of Unified Energy System's (MCX:FEES) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after investigating Federal Grid Company of Unified Energy System (MCX:FEES), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Federal Grid Company of Unified Energy System:

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

0.061 = ₽80b ÷ (₽1.4t - ₽72b) (Based on the trailing twelve months to September 2021).

So, Federal Grid Company of Unified Energy System has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 11%.

Check out our latest analysis for Federal Grid Company of Unified Energy System

Above you can see how the current ROCE for Federal Grid Company of Unified Energy System compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Federal Grid Company of Unified Energy System here for free.

What The Trend Of ROCE Can Tell Us

In terms of Federal Grid Company of Unified Energy System's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.5% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Federal Grid Company of Unified Energy System's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 18% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know about the risks facing Federal Grid Company of Unified Energy System, we've discovered 2 warning signs that you should be aware of.

While Federal Grid Company of Unified Energy System 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.