Today we'll look at PJSC Tatneft (MCX:TATN) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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?
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 PJSC Tatneft:
0.31 = ₽280b ÷ (₽1.3t - ₽390b) (Based on the trailing twelve months to September 2019.)
Therefore, PJSC Tatneft has an ROCE of 31%.
Does PJSC Tatneft Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. PJSC Tatneft's ROCE appears to be substantially greater than the 15% average in the Oil and Gas industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, PJSC Tatneft's ROCE currently appears to be excellent.
In our analysis, PJSC Tatneft's ROCE appears to be 31%, compared to 3 years ago, when its ROCE was 18%. This makes us wonder if the company is improving. The image below shows how PJSC Tatneft's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is 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. We note PJSC Tatneft could be considered a cyclical business. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for PJSC Tatneft.
How PJSC Tatneft's Current Liabilities Impact 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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
PJSC Tatneft has total liabilities of ₽390b and total assets of ₽1.3t. As a result, its current liabilities are equal to approximately 30% of its total assets. PJSC Tatneft has a medium level of current liabilities, boosting its ROCE somewhat.
What We Can Learn From PJSC Tatneft's ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. There might be better investments than PJSC Tatneft out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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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