Today we'll look at Public Joint Stock Company Magnitogorsk Iron & Steel Works (MCX:MAGN) and reflect on its potential as an investment. 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 up, we'll look at what ROCE is and how we calculate it. 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 'return' (pre-tax profit) a company generates from capital employed in its 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'.
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 Magnitogorsk Iron & Steel Works:
0.32 = US$1.8b ÷ (US$7.2b - US$1.4b) (Based on the trailing twelve months to December 2018.)
So, Magnitogorsk Iron & Steel Works has an ROCE of 32%.
Does Magnitogorsk Iron & Steel Works Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Magnitogorsk Iron & Steel Works's ROCE appears to be substantially greater than the 3.5% average in the Metals and Mining 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, Magnitogorsk Iron & Steel Works's ROCE currently appears to be excellent.
In our analysis, Magnitogorsk Iron & Steel Works's ROCE appears to be 32%, compared to 3 years ago, when its ROCE was 22%. This makes us wonder if the company is improving.
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 only a point-in-time measure. Remember that most companies like Magnitogorsk Iron & Steel Works are cyclical businesses. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Magnitogorsk Iron & Steel Works.
How Magnitogorsk Iron & Steel Works's Current Liabilities Impact 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Magnitogorsk Iron & Steel Works has total assets of US$7.2b and current liabilities of US$1.4b. As a result, its current liabilities are equal to approximately 19% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.
The Bottom Line On Magnitogorsk Iron & Steel Works's ROCE
This is good to see, and with such a high ROCE, Magnitogorsk Iron & Steel Works may be worth a closer look. There might be better investments than Magnitogorsk Iron & Steel Works out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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 email@example.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.