Today we are going to look at Kuban power and electrification public joint stock company (MCX:KUBE) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Kuban power and electrification:
0.096 = RUруб4.1b ÷ (RUруб71b - RUруб28b) (Based on the trailing twelve months to March 2019.)
So, Kuban power and electrification has an ROCE of 9.6%.
Is Kuban power and electrification's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Kuban power and electrification's ROCE is fairly close to the Electric Utilities industry average of 11%. Independently of how Kuban power and electrification compares to its industry, its ROCE in absolute terms is low; especially compared to the ~8.4% available in government bonds. Readers may wish to look for more rewarding investments.
Kuban power and electrification's current ROCE of 9.6% is lower than its ROCE in the past, which was 19%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how Kuban power and electrification's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Kuban power and electrification.
How Kuban power and electrification's Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
Kuban power and electrification has total assets of RUруб71b and current liabilities of RUруб28b. Therefore its current liabilities are equivalent to approximately 40% of its total assets. Kuban power and electrification has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.
The Bottom Line On Kuban power and electrification's ROCE
So researching other companies may be a better use of your time. Of course, you might also be able to find a better stock than Kuban power and electrification. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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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. Thank you for reading.