In This Article:
Today we are going to look at PJSC Russian Aquaculture (MCX:AQUA) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting 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. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 PJSC Russian Aquaculture:
0.34 = ₽3.5b ÷ (₽12b - ₽1.4b) (Based on the trailing twelve months to June 2019.)
Therefore, PJSC Russian Aquaculture has an ROCE of 34%.
Check out our latest analysis for PJSC Russian Aquaculture
Is PJSC Russian Aquaculture's ROCE Good?
One way to assess ROCE is to compare similar companies. In our analysis, PJSC Russian Aquaculture's ROCE is meaningfully higher than the 9.0% average in the Food industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, PJSC Russian Aquaculture's ROCE currently appears to be excellent.
The image below shows how PJSC Russian Aquaculture's ROCE compares to its industry, and you can click it to see more detail on its 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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If PJSC Russian Aquaculture is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
PJSC Russian Aquaculture'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 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 counter this, investors can check if a company has high current liabilities relative to total assets.