Today we'll evaluate Public Joint-Stock Company Interregional Distribution Grid Company of the North-West (MCX:MRKZ) to determine whether it could have potential as an investment idea. 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE 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. 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'.
How Do You Calculate Return On Capital Employed?
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 Interregional Distribution Grid Company of the North-West:
0.069 = ₽2.7b ÷ (₽50b - ₽12b) (Based on the trailing twelve months to September 2019.)
So, Interregional Distribution Grid Company of the North-West has an ROCE of 6.9%.
Is Interregional Distribution Grid Company of the North-West's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Interregional Distribution Grid Company of the North-West's ROCE is meaningfully below the Electric Utilities industry average of 8.7%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Interregional Distribution Grid Company of the North-West 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.
In our analysis, Interregional Distribution Grid Company of the North-West's ROCE appears to be 6.9%, compared to 3 years ago, when its ROCE was 3.9%. This makes us wonder if the company is improving. 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.
When considering this metric, keep in mind that it is backwards looking, and 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, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Interregional Distribution Grid Company of the North-West's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Interregional Distribution Grid Company of the North-West has total assets of ₽50b and current liabilities of ₽12b. As a result, its current liabilities are equal to approximately 23% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.
What We Can Learn From Interregional Distribution Grid Company of the North-West's ROCE
While that is good to see, Interregional Distribution Grid Company of the North-West has a low ROCE and does not look attractive in this analysis. Of course, you might also be able to find a better stock than Interregional Distribution Grid Company of the North-West. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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.