Interregional Distribution Grid Company of Urals' (MCX:MRKU) Returns On Capital Not Reflecting Well On The Business

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Interregional Distribution Grid Company of Urals (MCX:MRKU), it didn't seem to tick all of these boxes.

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

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. To calculate this metric for Interregional Distribution Grid Company of Urals, this is the formula:

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

0.021 = ₽1.6b ÷ (₽94b - ₽18b) (Based on the trailing twelve months to December 2020).

Thus, Interregional Distribution Grid Company of Urals has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 8.7%.

Check out our latest analysis for Interregional Distribution Grid Company of Urals

In the above chart we have measured Interregional Distribution Grid Company of Urals' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Interregional Distribution Grid Company of Urals.

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

When we looked at the ROCE trend at Interregional Distribution Grid Company of Urals, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.1% from 7.8% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Interregional Distribution Grid Company of Urals' ROCE

We're a bit apprehensive about Interregional Distribution Grid Company of Urals because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 96% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing: We've identified 3 warning signs with Interregional Distribution Grid Company of Urals (at least 2 which are a bit concerning) , and understanding these would certainly be useful.

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.

If you decide to trade Interregional Distribution Grid Company of Urals, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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