In This Article:
Today we'll evaluate Joint-stock company Slavneft-Megionneftegas (MCX:MFGS) 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 of all, we'll work out how to calculate ROCE. 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.
What is Return On Capital Employed (ROCE)?
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. 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?
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 Slavneft-Megionneftegas:
0.052 = ₽13b ÷ (₽286b - ₽42b) (Based on the trailing twelve months to December 2019.)
Therefore, Slavneft-Megionneftegas has an ROCE of 5.2%.
See our latest analysis for Slavneft-Megionneftegas
Does Slavneft-Megionneftegas Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Slavneft-Megionneftegas's ROCE appears to be significantly below the 11% average in the Oil and Gas industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Slavneft-Megionneftegas's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
Slavneft-Megionneftegas's current ROCE of 5.2% is lower than 3 years ago, when the company reported a 11% ROCE. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Slavneft-Megionneftegas's past growth compares to other companies.
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. Given the industry it operates in, Slavneft-Megionneftegas could be considered cyclical. You can check if Slavneft-Megionneftegas has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.