Interregional Distribution Grid Company of Siberia's (MCX:MRKS) Returns On Capital Not Reflecting Well On The Business

By
Simply Wall St
Published
September 24, 2021
MISX:MRKS
Source: Shutterstock

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Interregional Distribution Grid Company of Siberia (MCX:MRKS) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Interregional Distribution Grid Company of Siberia is:

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

0.087 = ₽4.6b ÷ (₽75b - ₽22b) (Based on the trailing twelve months to March 2021).

Therefore, Interregional Distribution Grid Company of Siberia has an ROCE of 8.7%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 10%.

View our latest analysis for Interregional Distribution Grid Company of Siberia

roce
MISX:MRKS Return on Capital Employed September 25th 2021

Above you can see how the current ROCE for Interregional Distribution Grid Company of Siberia compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Interregional Distribution Grid Company of Siberia here for free.

So How Is Interregional Distribution Grid Company of Siberia's ROCE Trending?

When we looked at the ROCE trend at Interregional Distribution Grid Company of Siberia, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.7% from 13% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Interregional Distribution Grid Company of Siberia has decreased its current liabilities to 30% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 Interregional Distribution Grid Company of Siberia's ROCE

In summary, Interregional Distribution Grid Company of Siberia is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 518% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Interregional Distribution Grid Company of Siberia does come with some risks, and we've found 1 warning sign that you should be aware of.

While Interregional Distribution Grid Company of Siberia 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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