Is Public Joint-Stock Company Federal Grid Company of Unified Energy System’s (MCX:FEES) 9.1% Return On Capital Employed Good News?
Today we'll look at Public Joint-Stock Company Federal Grid Company of Unified Energy System (MCX:FEES) 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.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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?
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 Federal Grid Company of Unified Energy System:
0.091 = ₽108b ÷ (₽1.3t - ₽88b) (Based on the trailing twelve months to September 2019.)
Therefore, Federal Grid Company of Unified Energy System has an ROCE of 9.1%.
View our latest analysis for Federal Grid Company of Unified Energy System
Is Federal Grid Company of Unified Energy System's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Federal Grid Company of Unified Energy System's ROCE appears to be around the 8.7% average of the Electric Utilities industry. Regardless of how Federal Grid Company of Unified Energy System stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
You can click on the image below to see (in greater detail) how Federal Grid Company of Unified Energy System's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and 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, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Federal Grid Company of Unified Energy System's Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Federal Grid Company of Unified Energy System has total assets of ₽1.3t and current liabilities of ₽88b. Therefore its current liabilities are equivalent to approximately 7.0% of its total assets. With barely any current liabilities, there is minimal impact on Federal Grid Company of Unified Energy System's admittedly low ROCE.
What We Can Learn From Federal Grid Company of Unified Energy System's ROCE
Nevertheless, there are potentially more attractive companies to invest in. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
