In This Article:
Today we are going to look at PJSC PhosAgro (MCX:PHOR) to see whether it might be an attractive investment prospect. 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. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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?
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 PJSC PhosAgro:
0.22 = ₽52b ÷ (₽303b - ₽64b) (Based on the trailing twelve months to December 2019.)
Therefore, PJSC PhosAgro has an ROCE of 22%.
See our latest analysis for PJSC PhosAgro
Is PJSC PhosAgro's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that PJSC PhosAgro's ROCE is meaningfully better than the 16% average in the Chemicals 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. Regardless of where PJSC PhosAgro sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
PJSC PhosAgro's current ROCE of 22% is lower than 3 years ago, when the company reported a 32% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how PJSC PhosAgro's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
PJSC PhosAgro's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.