Here’s What Public Joint Stock Company Gazprom Gazoraspredelenie Rostov-na-Donu’s (MCX:RTGZ) Return On Capital Can Tell Us

Simply Wall St

Tue, May 28, 2019, 3:04 AM

Today we'll evaluate Public Joint Stock Company Gazprom Gazoraspredelenie Rostov-na-Donu (MCX:RTGZ) 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.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. Ultimately, it is a useful but imperfect metric. 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'.

So, How Do We Calculate ROCE?

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 Gazprom Gazoraspredelenie Rostov-na-Donu:

0.072 = RUруб1.4b ÷ (RUруб22b - RUруб2.5b) (Based on the trailing twelve months to December 2018.)

Therefore, Gazprom Gazoraspredelenie Rostov-na-Donu has an ROCE of 7.2%.

See our latest analysis for Gazprom Gazoraspredelenie Rostov-na-Donu

Is Gazprom Gazoraspredelenie Rostov-na-Donu's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. We can see Gazprom Gazoraspredelenie Rostov-na-Donu's ROCE is around the 8.5% average reported by the Gas Utilities industry. Regardless of how Gazprom Gazoraspredelenie Rostov-na-Donu 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.

As we can see, Gazprom Gazoraspredelenie Rostov-na-Donu currently has an ROCE of 7.2%, less than the 12% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.

MISX:RTGZ Past Revenue and Net Income, May 28th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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 Gazprom Gazoraspredelenie Rostov-na-Donu? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.