Should You Be Impressed By Rosseti's (MCX:RSTI) Returns on Capital?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Rosseti (MCX:RSTI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. The formula for this calculation on Rosseti is:

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

0.064 = ₽150b ÷ (₽2.7t - ₽373b) (Based on the trailing twelve months to September 2020).

So, Rosseti has an ROCE of 6.4%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 7.7%.

See our latest analysis for Rosseti

Above you can see how the current ROCE for Rosseti compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Rosseti in recent years. The company has consistently earned 6.4% for the last five years, and the capital employed within the business has risen 35% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Rosseti's ROCE

In conclusion, Rosseti has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 284% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know about the risks facing Rosseti, we've discovered 2 warning signs that you should be aware of.

While Rosseti 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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