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Today we are going to look at Public Joint-Stock Company Interregional Distribution Grid Company of the North-West (MCX:MRKZ) 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. 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'.
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 Interregional Distribution Grid Company of the North-West:
0.087 = RUруб2.9b ÷ (RUруб52b - RUруб19b) (Based on the trailing twelve months to March 2019.)
Therefore, Interregional Distribution Grid Company of the North-West has an ROCE of 8.7%.
Is Interregional Distribution Grid Company of the North-West's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Interregional Distribution Grid Company of the North-West's ROCE is fairly close to the Electric Utilities industry average of 10%. Independently of how Interregional Distribution Grid Company of the North-West compares to its industry, its ROCE in absolute terms is low; especially compared to the ~8.4% available in government bonds. It is likely that there are more attractive prospects out there.
Our data shows that Interregional Distribution Grid Company of the North-West currently has an ROCE of 8.7%, compared to its ROCE of 5.9% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Interregional Distribution Grid Company of the North-West'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. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Interregional Distribution Grid Company of the North-West.
Do Interregional Distribution Grid Company of the North-West'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 the North-West has total liabilities of RUруб19b and total assets of RUруб52b. As a result, its current liabilities are equal to approximately 36% of its total assets. Interregional Distribution Grid Company of the North-West has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.
The Bottom Line On Interregional Distribution Grid Company of the North-West's ROCE
This company may not be the most attractive investment prospect. 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.
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.
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. Thank you for reading.