Today we’ll look at Public Joint-Stock Company Interregional Distribution Grid Company of Volga (MCX:MRKV) and reflect on its potential as an investment. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we’ll work out how to calculate ROCE. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.
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 Interregional Distribution Grid Company of Volga:
0.12 = ₽5.7b ÷ (₽54b – ₽6.4b) (Based on the trailing twelve months to June 2019.)
Therefore, Interregional Distribution Grid Company of Volga has an ROCE of 12%.
Does Interregional Distribution Grid Company of Volga Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. It appears that Interregional Distribution Grid Company of Volga’s ROCE is fairly close to the Electric Utilities industry average of 11%. Setting aside the industry comparison for now, Interregional Distribution Grid Company of Volga’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
In our analysis, Interregional Distribution Grid Company of Volga’s ROCE appears to be 12%, compared to 3 years ago, when its ROCE was 8.4%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Interregional Distribution Grid Company of Volga’s past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Interregional Distribution Grid Company of Volga.
How Interregional Distribution Grid Company of Volga’s Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Interregional Distribution Grid Company of Volga has total liabilities of ₽6.4b and total assets of ₽54b. Therefore its current liabilities are equivalent to approximately 12% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
The Bottom Line On Interregional Distribution Grid Company of Volga’s ROCE
With that in mind, we’re not overly impressed with Interregional Distribution Grid Company of Volga’s ROCE, so it may not be the most appealing prospect. You might be able to find a better investment than Interregional Distribution Grid Company of Volga. 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).
I will like Interregional Distribution Grid Company of Volga better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.