What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Irkutsk Energetics and Electrification (MCX:IRGZ) and its ROCE trend, we weren't exactly thrilled.
Understanding 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 Irkutsk Energetics and Electrification:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = ₽17b ÷ (₽314b - ₽103b) (Based on the trailing twelve months to December 2020).
Thus, Irkutsk Energetics and Electrification has an ROCE of 8.1%. On its own, that's a low figure but it's around the 8.9% average generated by the Electric Utilities industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Irkutsk Energetics and Electrification's ROCE against it's prior returns. If you're interested in investigating Irkutsk Energetics and Electrification's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
On the surface, the trend of ROCE at Irkutsk Energetics and Electrification doesn't inspire confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 8.1%. However it looks like Irkutsk Energetics and Electrification might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
Bringing it all together, while we're somewhat encouraged by Irkutsk Energetics and Electrification'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. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
Irkutsk Energetics and Electrification does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those are a bit unpleasant...
While Irkutsk Energetics and Electrification 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.
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