Capital Allocation Trends At Rosseti Moscow Region (MCX:MSRS) Aren't Ideal

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Rosseti Moscow Region (MCX:MSRS) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Rosseti Moscow Region, this is the formula:

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

0.067 = ₽20b ÷ (₽357b - ₽63b) (Based on the trailing twelve months to December 2020).

Thus, Rosseti Moscow Region has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 9.8%.

View our latest analysis for Rosseti Moscow Region

In the above chart we have measured Rosseti Moscow Region'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 Moscow Region.

So How Is Rosseti Moscow Region's ROCE Trending?

There is reason to be cautious about Rosseti Moscow Region, given the returns are trending downwards. To be more specific, the ROCE was 9.4% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Rosseti Moscow Region becoming one if things continue as they have.

The Bottom Line On Rosseti Moscow Region's ROCE

In summary, it's unfortunate that Rosseti Moscow Region is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 69% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing to note, we've identified 3 warning signs with Rosseti Moscow Region and understanding them should be part of your investment process.

While Rosseti Moscow Region 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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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.
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