Today we'll evaluate Public Joint Stock Company Mostotrest (MCX:MSTT) 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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.
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 Mostotrest:
0.22 = ₽9.3b ÷ (₽149b - ₽107b) (Based on the trailing twelve months to June 2019.)
So, Mostotrest has an ROCE of 22%.
View our latest analysis for Mostotrest
Is Mostotrest's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Mostotrest's ROCE appears to be substantially greater than the 11% average in the Construction 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. Separate from Mostotrest's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Mostotrest's current ROCE of 22% is lower than its ROCE in the past, which was 44%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Mostotrest's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Mostotrest? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Mostotrest's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Mostotrest has total assets of ₽149b and current liabilities of ₽107b. Therefore its current liabilities are equivalent to approximately 72% of its total assets. Mostotrest's current liabilities are fairly high, which increases its ROCE significantly.
The Bottom Line On Mostotrest's ROCE
The ROCE would not look as appealing if the company had fewer current liabilities. Mostotrest shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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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. Thank you for reading.