Today we'll look at Public Joint Stock Company Magnit (MCX:MGNT) and reflect on its potential as an investment. 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 Magnit:
0.064 = ₽41b ÷ (₽949b - ₽300b) (Based on the trailing twelve months to December 2019.)
So, Magnit has an ROCE of 6.4%.
Is Magnit's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Magnit's ROCE appears to be significantly below the 9.3% average in the Consumer Retailing industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Magnit stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
Magnit's current ROCE of 6.4% is lower than its ROCE in the past, which was 24%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how Magnit's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Magnit.
How Magnit'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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Magnit has total assets of ₽949b and current liabilities of ₽300b. Therefore its current liabilities are equivalent to approximately 32% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Magnit's ROCE is concerning.
What We Can Learn From Magnit's ROCE
There are likely better investments out there. Of course, you might also be able to find a better stock than Magnit. 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.
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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