Return Trends At Sakhalinenergo (MCX:SLEN) Aren't Appealing

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Sakhalinenergo (MCX:SLEN) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Sakhalinenergo, this is the formula:

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

0.10 = ₽2.5b ÷ (₽32b - ₽6.8b) (Based on the trailing twelve months to December 2020).

Therefore, Sakhalinenergo has an ROCE of 10.0%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 8.5%.

View our latest analysis for Sakhalinenergo

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sakhalinenergo's ROCE against it's prior returns. If you're interested in investigating Sakhalinenergo's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Sakhalinenergo in recent years. The company has consistently earned 10.0% for the last five years, and the capital employed within the business has risen 715% 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.

On a side note, Sakhalinenergo has done well to reduce current liabilities to 21% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

As we've seen above, Sakhalinenergo's returns on capital haven't increased but it is reinvesting in the business. And with the stock having returned a mere 0.2% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing: We've identified 5 warning signs with Sakhalinenergo (at least 3 which are a bit unpleasant) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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