These Return Metrics Don't Make Krasnoyarskenergosbyt (MCX:KRSB) Look Too Strong

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Krasnoyarskenergosbyt (MCX:KRSB), the trends above didn't look too great.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Krasnoyarskenergosbyt:

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

0.011 = ₽20m ÷ (₽5.3b - ₽3.5b) (Based on the trailing twelve months to December 2020).

So, Krasnoyarskenergosbyt has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 9.8%.

See our latest analysis for Krasnoyarskenergosbyt

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

The Trend Of ROCE

There is reason to be cautious about Krasnoyarskenergosbyt, given the returns are trending downwards. About five years ago, returns on capital were 39%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Krasnoyarskenergosbyt becoming one if things continue as they have.

On a side note, Krasnoyarskenergosbyt's current liabilities are still rather high at 66% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these poor fundamentals, the stock has gained a huge 430% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know about the risks facing Krasnoyarskenergosbyt, we've discovered 2 warning signs that you should be aware of.

While Krasnoyarskenergosbyt isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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