Rosseti Volga (MCX:MRKV) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Rosseti Volga (MCX:MRKV) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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. To calculate this metric for Rosseti Volga, this is the formula:

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

0.0039 = ₽203m ÷ (₽61b - ₽9.0b) (Based on the trailing twelve months to December 2020).

Therefore, Rosseti Volga has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 9.8%.

See our latest analysis for Rosseti Volga

Above you can see how the current ROCE for Rosseti Volga compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Rosseti Volga.

What Does the ROCE Trend For Rosseti Volga Tell Us?

When we looked at the ROCE trend at Rosseti Volga, we didn't gain much confidence. Around five years ago the returns on capital were 6.8%, but since then they've fallen to 0.4%. However it looks like Rosseti Volga might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Rosseti Volga's ROCE

Bringing it all together, while we're somewhat encouraged by Rosseti Volga's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 233% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing Rosseti Volga, we've discovered 1 warning sign that you should be aware of.

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.

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