Today we’ll evaluate Tomsk Distribution Company (MCX:TORS) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Tomsk Distribution:
0.036 = ₽167m ÷ (₽5.6b – ₽934m) (Based on the trailing twelve months to December 2019.)
Therefore, Tomsk Distribution has an ROCE of 3.6%.
Does Tomsk Distribution Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Tomsk Distribution’s ROCE appears meaningfully below the 8.3% average reported by the Electric Utilities industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Tomsk Distribution’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
We can see that, Tomsk Distribution currently has an ROCE of 3.6%, less than the 6.2% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how Tomsk Distribution’s ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Tomsk Distribution’s ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Tomsk Distribution has current liabilities of ₽934m and total assets of ₽5.6b. Therefore its current liabilities are equivalent to approximately 17% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.
Our Take On Tomsk Distribution’s ROCE
Tomsk Distribution has a poor ROCE, and there may be better investment prospects out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.