Today we'll evaluate Public Joint Stock Company Mosenergo (MCX:MSNG) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into 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. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
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. 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.
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 Mosenergo:
0.069 = ₽22b ÷ (₽335b - ₽18b) (Based on the trailing twelve months to September 2019.)
Therefore, Mosenergo has an ROCE of 6.9%.
View our latest analysis for Mosenergo
Does Mosenergo Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Mosenergo's ROCE appears meaningfully below the 8.7% average reported by the Electric Utilities industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Mosenergo's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
In our analysis, Mosenergo's ROCE appears to be 6.9%, compared to 3 years ago, when its ROCE was 4.2%. This makes us wonder if the company is improving. The image below shows how Mosenergo's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and 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 Mosenergo.
Mosenergo's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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.
Mosenergo has current liabilities of ₽18b and total assets of ₽335b. Therefore its current liabilities are equivalent to approximately 5.3% of its total assets. With barely any current liabilities, there is minimal impact on Mosenergo's admittedly low ROCE.
Our Take On Mosenergo's ROCE
Nonetheless, there may be better places to invest your capital. Of course, you might also be able to find a better stock than Mosenergo. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Mosenergo better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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.
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February 03, 2020 at 03:28PM
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Shareholders Should Look Hard At Public Joint Stock Company Mosenergo’s (MCX:MSNG) 6.9%Return On Capital - Yahoo Finance
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