Gazprom (MCX: GAZP) reinvests at lower rates of return

If we are to find a title that could multiply over the long term, what are the underlying trends that we need to look for? Ideally, a business will display two trends; first growth to come back on capital employed (ROCE) and on the other hand, an increase amount capital employed. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. However, after investigation Gazprom (MCX: GAZP), we don’t think the current trends fit the mold of a multi-bagger.

What is Return on Employee Capital (ROCE)?

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Gazprom, here is the formula:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.042 = 909b ÷ (₽24t – ₽2.5t) (Based on the last twelve months up to March 2021).

Then, Gazprom has a ROCE of 4.2%. At the end of the day, that’s a low return and it’s lower than the oil and gas industry average of 6.2%.

Discover our latest analysis for Gazprom

MISX: GAZP Return on capital employed on August 3, 2021

Above you can see how Gazprom’s current ROCE compares to its previous returns on equity, but there isn’t much you can say about the past. If you wish, you can consult the Gazprom analysts’ forecasts here for free.

What can we say about Gazprom’s ROCE trend?

In terms of Gazprom’s historic ROCE movements, the trend is not great. About five years ago, returns on capital were 7.7%, but since then they have fallen to 4.2%. On the flip side, the company has employed more capital with no corresponding improvement in sales over the past year, which might suggest that these investments are longer-term games. It may take some time for the business to begin to see a change in the benefits of these investments.

The key to take away

In summary, although we are somewhat encouraged by Gazprom’s reinvestment in its own business, we are aware that the returns are diminishing. Yet for long-term shareholders, the stock has offered them an incredible 187% return over the past five years, so the market seems bullish on its future. But if the trajectory of those underlying trends continues, we think the likelihood of it being a multi-bag from here is not high.

Gazprom does present certain risks, however, and we have identified 1 warning sign for Gazprom that might interest you.

Although Gazprom does not currently achieve the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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