Today we'll evaluate Lipetsk Power Sale Company Open Joint-Stock Company (MCX:LPSB) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of 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 measures the amount of pre-tax profits a company can generate from the capital employed 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.
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 Lipetsk Power Sale Company:
0.006 = ₽8.0m ÷ (₽2.1b - ₽758m) (Based on the trailing twelve months to June 2019.)
Therefore, Lipetsk Power Sale Company has an ROCE of 0.6%.
Does Lipetsk Power Sale Company Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Lipetsk Power Sale Company's ROCE appears meaningfully below the 9.3% average reported by the Electric Utilities industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Lipetsk Power Sale Company stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
You can see in the image below how Lipetsk Power Sale Company'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. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. You can check if Lipetsk Power Sale Company has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Lipetsk Power Sale Company's Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Lipetsk Power Sale Company has total liabilities of ₽758m and total assets of ₽2.1b. Therefore its current liabilities are equivalent to approximately 37% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Lipetsk Power Sale Company's ROCE is concerning.
What We Can Learn From Lipetsk Power Sale Company's ROCE
There are likely better investments out there. 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.
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 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.
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. Thank you for reading.