Today we are going to look at Public Joint-Stock Company Interregional Distribution Grid Company of the North-West (MCX:MRKZ) to see whether it might be an attractive investment prospect. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Interregional Distribution Grid Company of the North-West:
0.087 = RUруб2.8b ÷ (RUруб51b – RUруб19b) (Based on the trailing twelve months to December 2018.)
Therefore, Interregional Distribution Grid Company of the North-West has an ROCE of 8.7%.
Does Interregional Distribution Grid Company of the North-West Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Interregional Distribution Grid Company of the North-West’s ROCE is fairly close to the Electric Utilities industry average of 9.7%. Independently of how Interregional Distribution Grid Company of the North-West compares to its industry, its ROCE in absolute terms is low; especially compared to the ~8.4% available in government bonds. Readers may wish to look for more rewarding investments.
As we can see, Interregional Distribution Grid Company of the North-West currently has an ROCE of 8.7% compared to its ROCE 3 years ago, which was 4.9%. This makes us wonder if the company is improving.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. You can check if Interregional Distribution Grid Company of the North-West has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Interregional Distribution Grid Company of the North-West’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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. 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 the North-West has total liabilities of RUруб19b and total assets of RUруб51b. As a result, its current liabilities are equal to approximately 38% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Interregional Distribution Grid Company of the North-West’s ROCE is concerning.
Our Take On Interregional Distribution Grid Company of the North-West’s ROCE
So researching other companies may be a better use of your time. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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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.