Is Rosseti Volga (MCX:MRKV) Struggling?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Rosseti Volga (MCX:MRKV), we weren't too hopeful.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Rosseti Volga:

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

0.023 = ₽1.2b ÷ (₽60b - ₽7.8b) (Based on the trailing twelve months to September 2020).

Therefore, Rosseti Volga has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 7.7%.

View our latest analysis for Rosseti Volga

In the above chart we have measured Rosseti Volga's 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 Rosseti Volga.

What Can We Tell From Rosseti Volga's ROCE Trend?

In terms of Rosseti Volga's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 4.9% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Rosseti Volga becoming one if things continue as they have.

What We Can Learn From Rosseti Volga's ROCE

In summary, it's unfortunate that Rosseti Volga is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 429%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching Rosseti Volga, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Rosseti Volga isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

If you decide to trade Rosseti Volga, 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.