Kaluga Power Sale Company (MCX:KLSB) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Kaluga Power Sale Company (MCX:KLSB) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Kaluga Power Sale Company:

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

0.094 = ₽434m ÷ (₽7.1b - ₽2.4b) (Based on the trailing twelve months to December 2020).

Therefore, Kaluga Power Sale Company has an ROCE of 9.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.4%.

See our latest analysis for Kaluga Power Sale Company

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kaluga Power Sale Company's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Kaluga Power Sale Company, check out these free graphs here.

What Does the ROCE Trend For Kaluga Power Sale Company Tell Us?

When we looked at the ROCE trend at Kaluga Power Sale Company, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.4% from 14% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

On a related note, Kaluga Power Sale Company has decreased its current liabilities to 34% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Kaluga Power Sale Company's ROCE

To conclude, we've found that Kaluga Power Sale Company is reinvesting in the business, but returns have been falling. Since the stock has declined 61% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Kaluga Power Sale Company does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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