Our Take On The Returns On Capital At Interregional Distribution Grid Company of Urals (MCX:MRKU)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Interregional Distribution Grid Company of Urals (MCX:MRKU) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Interregional Distribution Grid Company of Urals is:

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

0.024 = ₽1.9b ÷ (₽93b - ₽16b) (Based on the trailing twelve months to September 2020).

Therefore, Interregional Distribution Grid Company of Urals has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 7.8%.

View 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, you can check out the forecasts from the analysts covering Interregional Distribution Grid Company of Urals here for free.

What Can We Tell From Interregional Distribution Grid Company of Urals' ROCE Trend?

In terms of Interregional Distribution Grid Company of Urals' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.4% from 5.9% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

On a side note, Interregional Distribution Grid Company of Urals has done well to pay down its current liabilities to 17% of total assets. So we could link some of this to the decrease in ROCE. 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.

The Bottom Line

In summary, we're somewhat concerned by Interregional Distribution Grid Company of Urals' diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 100% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 3 warning signs with Interregional Distribution Grid Company of Urals (at least 2 which can't be ignored) , and understanding these would certainly be useful.

While Interregional Distribution Grid Company of Urals may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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