Today we’ll look at Public Joint-stock Company TNS energo Mari El (MCX:MISB) and reflect on its potential as an investment. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, ROCE is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for TNS energo Mari El:
0.27 = RUруб41m ÷ (RUруб1.7b – RUруб973m) (Based on the trailing twelve months to June 2018.)
So, TNS energo Mari El has an ROCE of 27%.
Is TNS energo Mari El’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. TNS energo Mari El’s ROCE appears to be substantially greater than the 9.7% average in the Electric Utilities industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, TNS energo Mari El’s ROCE is currently very good.
TNS energo Mari El’s current ROCE of 27% is lower than 3 years ago, when the company reported a 61% ROCE. Therefore we wonder if the company is facing new headwinds.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. You can check if TNS energo Mari El has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How TNS energo Mari El’s Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
TNS energo Mari El has total assets of RUруб1.7b and current liabilities of RUруб973m. As a result, its current liabilities are equal to approximately 57% of its total assets. While a high level of current liabilities boosts its ROCE, TNS energo Mari El’s returns are still very good.
The Bottom Line On TNS energo Mari El’s ROCE
So to us, the company is potentially worth investigating further. You might be able to find a better buy than TNS energo Mari El. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
Of course TNS energo Mari El may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.