Interregional Distribution Grid Company of the North-West (MCX:MRKZ) Will Be Hoping To Turn Its Returns On Capital Around

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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Interregional Distribution Grid Company of the North-West (MCX:MRKZ), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Interregional Distribution Grid Company of the North-West, this is the formula:

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

0.026 = ₽756m ÷ (₽49b - ₽20b) (Based on the trailing twelve months to December 2020).

So, Interregional Distribution Grid Company of the North-West has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 9.7%.

See our latest analysis for Interregional Distribution Grid Company of the North-West

In the above chart we have measured Interregional Distribution Grid Company of the North-West's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Interregional Distribution Grid Company of the North-West's ROCE Trend?

In terms of Interregional Distribution Grid Company of the North-West's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 4.9%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Interregional Distribution Grid Company of the North-West becoming one if things continue as they have.

On a side note, Interregional Distribution Grid Company of the North-West's current liabilities are still rather high at 41% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In summary, it's unfortunate that Interregional Distribution Grid Company of the North-West is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 55% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 1 warning sign for Interregional Distribution Grid Company of the North-West you'll probably want to know about.

While Interregional Distribution Grid Company of the North-West 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.

If you’re looking to trade Interregional Distribution Grid Company of the North-West, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide 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.