Today we are going to look at Interregional Distribution Grid Company of South Public Joint Stock Company (MCX:MRKY) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding 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. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
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 Interregional Distribution Grid Company of South:
0.14 = ₽3.9b ÷ (₽40b - ₽12b) (Based on the trailing twelve months to September 2019.)
So, Interregional Distribution Grid Company of South has an ROCE of 14%.
Is Interregional Distribution Grid Company of South's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Interregional Distribution Grid Company of South's ROCE appears to be substantially greater than the 8.7% average in the Electric Utilities industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from how Interregional Distribution Grid Company of South stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
We can see that, Interregional Distribution Grid Company of South currently has an ROCE of 14%, less than the 27% it reported 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Interregional Distribution Grid Company of South'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. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Interregional Distribution Grid Company of South's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Interregional Distribution Grid Company of South has total liabilities of ₽12b and total assets of ₽40b. Therefore its current liabilities are equivalent to approximately 29% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
What We Can Learn From Interregional Distribution Grid Company of South's ROCE
If Interregional Distribution Grid Company of South continues to earn an uninspiring ROCE, there may be better places to invest. 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
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