Lipetsk Power Sale Company (MCX:LPSB) Shareholders Will Want The ROCE Trajectory To Continue

What are the early trends we should look for to identify a stock that could 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. So on that note, Lipetsk Power Sale Company (MCX:LPSB) looks quite promising in regards to its trends of return on capital.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Lipetsk Power Sale Company is:

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

0.094 = ₽107m ÷ (₽2.5b - ₽1.3b) (Based on the trailing twelve months to December 2020).

So, Lipetsk Power Sale Company has an ROCE of 9.4%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 11%.

Check out our latest analysis for Lipetsk Power Sale Company

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

What Can We Tell From Lipetsk Power Sale Company's ROCE Trend?

We're delighted to see that Lipetsk Power Sale Company is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 9.4% on its capital. Not only that, but the company is utilizing 30% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 54%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Lipetsk Power Sale Company has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Key Takeaway

To the delight of most shareholders, Lipetsk Power Sale Company has now broken into profitability. And a remarkable 158% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to know some of the risks facing Lipetsk Power Sale Company we've found 4 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.