In This Article:
Today we'll look at Public Joint Stock Company Raspadskaya (MCX:RASP) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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.
How Do You Calculate Return On Capital Employed?
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 Raspadskaya:
0.21 = US$273m ÷ (US$1.6b - US$327m) (Based on the trailing twelve months to December 2019.)
Therefore, Raspadskaya has an ROCE of 21%.
View our latest analysis for Raspadskaya
Is Raspadskaya's ROCE Good?
One way to assess ROCE is to compare similar companies. Raspadskaya's ROCE appears to be substantially greater than the 10% average in the Metals and Mining industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Raspadskaya's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Raspadskaya's current ROCE of 21% is lower than its ROCE in the past, which was 46%, 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Raspadskaya's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. We note Raspadskaya could be considered a cyclical business. If Raspadskaya is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Raspadskaya's Current Liabilities Impact Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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.