If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Gazprom Gazoraspredelenie Rostov-na-Donu (MCX:RTGZ), we don't think it's current trends fit the mold of a multi-bagger.
What is 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. The formula for this calculation on Gazprom Gazoraspredelenie Rostov-na-Donu is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = ₽1.1b ÷ (₽25b - ₽4.2b) (Based on the trailing twelve months to December 2020).
Thus, Gazprom Gazoraspredelenie Rostov-na-Donu has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Gas Utilities industry average of 6.7%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Gazprom Gazoraspredelenie Rostov-na-Donu has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
On the surface, the trend of ROCE at Gazprom Gazoraspredelenie Rostov-na-Donu doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 5.2%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.
The Bottom Line
To conclude, we've found that Gazprom Gazoraspredelenie Rostov-na-Donu is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 181% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Gazprom Gazoraspredelenie Rostov-na-Donu does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is significant...
While Gazprom Gazoraspredelenie Rostov-na-Donu 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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