Today we'll evaluate Public Joint Stock Company "Ashinskiy metallurgical works" (MCX:AMEZ) to determine whether it could have potential as an investment idea. 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.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

What is 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. 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 Ashinskiy metallurgical works:

0.12 = ₽1.5b ÷ (₽17b - ₽4.5b) (Based on the trailing twelve months to June 2019.)

So, Ashinskiy metallurgical works has an ROCE of 12%.

Check out our latest analysis for Ashinskiy metallurgical works

Does Ashinskiy metallurgical works Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Ashinskiy metallurgical works's ROCE appears to be substantially greater than the 9.2% 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. Separate from how Ashinskiy metallurgical works stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

In our analysis, Ashinskiy metallurgical works's ROCE appears to be 12%, compared to 3 years ago, when its ROCE was 5.4%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Ashinskiy metallurgical works'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 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 Ashinskiy metallurgical works could be considered a cyclical business. How cyclical is Ashinskiy metallurgical works? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Do Ashinskiy metallurgical works's Current Liabilities Skew Its ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Ashinskiy metallurgical works has total assets of ₽17b and current liabilities of ₽4.5b. As a result, its current liabilities are equal to approximately 26% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

The Bottom Line On Ashinskiy metallurgical works's ROCE

If Ashinskiy metallurgical works continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like Ashinskiy metallurgical works better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.

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. Thank you for reading.