In This Article:
Today we'll evaluate Public Joint Stock Company Raspadskaya (MCX:RASP) 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, 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.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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:
0.41 = US$534m ÷ (US$1.9b - US$581m) (Based on the trailing twelve months to June 2019.)
Therefore, Raspadskaya has an ROCE of 41%.
Check out our latest analysis for Raspadskaya
Is Raspadskaya's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Raspadskaya's ROCE is meaningfully higher than the 9.3% average in the Metals and Mining 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. Putting aside its position relative to its industry for now, in absolute terms, Raspadskaya's ROCE is currently very good.
Raspadskaya has an ROCE of 41%, but it didn't have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving. You can see in the image below how Raspadskaya's ROCE compares to its industry. Click to see more on 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. ROCE is, after all, simply a snap shot of a single year. Given the industry it operates in, Raspadskaya could be considered cyclical. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.