Did you know that certain financial measures can provide clues about a potential multi-bagger? Ideally, a business will display two trends; first growth to recover on capital employed (ROCE) and on the other hand, an increase amount capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. In light of this, when we looked at Siberian Interregional Distribution Network Company (MCX: MRKS) and its ROCE trend, we weren’t exactly thrilled.
Understanding Return on Capital Employed (ROCE)
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on the Interregional Siberian Distribution Network Company is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.087 = ₽4.6b ÷ (₽75b – ₽22b) (Based on the last twelve months up to March 2021).
Therefore, The Siberian Interregional Distribution Network Company has a ROCE of 8.7%. In absolute terms, this is low performance, but it sits around the 10% electric utility industry average.
Check out our latest review for the Siberian Interregional Distribution Network Company
Above you can see how the Siberian Interregional Distribution Network Company’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you want, you can check here the analysts’ forecasts of the Siberian Interregional Distribution Network Company for free.
So what is the Siberian interregional distribution network company ROCE trend?
When we looked at the ROCE trend at Interregional Distribution Grid Company of Siberia, we didn’t gain much confidence. Over the past five years, return on capital has declined to 8.7% from 13% five years ago. On the flip side, the company has employed more capital with no corresponding improvement in sales over the past year, which might suggest that these investments are longer-term games. It may take some time for the business to begin to see a change in the benefits of these investments.
On a related note, the Siberian Interregional Distribution Network Company reduced its short-term liabilities to 30% of total assets. This could partly explain the drop in ROCE. In addition, it can reduce some aspects of the risk to the business, as the company’s suppliers or short-term creditors are now less funding its operations. Since the company essentially finances a larger portion of its operations with its own money, you could argue that this has made the company less efficient at generating ROCE.
What we can learn from the Siberian ROCE interregional distribution network company
In summary, Interregional Distribution Grid Company of Siberia is reinvesting funds into the business for growth, but sadly it looks like sales haven’t grown much yet. Yet to long-term shareholders, the stock has offered them an incredible 518% return over the past five years, so the market seems bullish on its future. However, unless these underlying trends turn more positive, our hopes would not be too high.
Like most businesses, the Interregional Distribution Grid Company of Siberia carries certain risks, and we have found 1 warning sign that you should be aware of.
Although the Siberian Interregional Distribution Network Company does not generate the highest return, check out this free list of companies that generate high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St does not have any position in the mentioned stocks.
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