If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Sakhalinenergo (MCX:SLEN) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Sakhalinenergo is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = ₽2.6b ÷ (₽43b - ₽13b) (Based on the trailing twelve months to June 2021).
Thus, Sakhalinenergo has an ROCE of 8.6%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 11%.
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 Does the ROCE Trend For Sakhalinenergo Tell Us?
On the surface, the trend of ROCE at Sakhalinenergo doesn't inspire confidence. Over the last four years, returns on capital have decreased to 8.6% from 20% four years ago. 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 On Sakhalinenergo's ROCE
To conclude, we've found that Sakhalinenergo is reinvesting in the business, but returns have been falling. Since the stock has declined 45% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
One final note, you should learn about the 4 warning signs we've spotted with Sakhalinenergo (including 2 which are concerning) .
While Sakhalinenergo 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. 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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