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Why Public Joint Stock Company Aeroflot – Russian Airlines’s (MCX:AFLT) Return On Capital Employed Is Impressive

Simply Wall St

Today we’ll look at Public Joint Stock Company Aeroflot – Russian Airlines (MCX:AFLT) and reflect on its potential as an investment. 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 of all, we’ll work out how to calculate ROCE. Then we’ll compare its ROCE to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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 Aeroflot – Russian Airlines:

0.20 = RUруб41b ÷ (RUруб337b – RUруб157b) (Based on the trailing twelve months to September 2018.)

So, Aeroflot – Russian Airlines has an ROCE of 20%.

Check out our latest analysis for Aeroflot – Russian Airlines

Does Aeroflot – Russian Airlines Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Aeroflot – Russian Airlines’s ROCE appears to be substantially greater than the 15% average in the Airlines industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Aeroflot – Russian Airlines compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

MISX:AFLT Past Revenue and Net Income, February 25th 2019

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 Aeroflot – Russian Airlines.

What Are Current Liabilities, And How Do They Affect Aeroflot – Russian Airlines’s ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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.

Aeroflot – Russian Airlines has total assets of RUруб337b and current liabilities of RUруб157b. Therefore its current liabilities are equivalent to approximately 47% of its total assets. With this level of current liabilities, Aeroflot – Russian Airlines’s ROCE is boosted somewhat.

The Bottom Line On Aeroflot – Russian Airlines’s ROCE

With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. But note: Aeroflot – Russian Airlines may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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).

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 editorial-team@simplywallst.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. Thank you for reading.