Yahoo Finance Is Eland Oil & Gas PLC’s (LON:ELA) 19% ROCE Any Good?
Today we are going to look at Eland Oil & Gas PLC (LON:ELA) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the 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.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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'.
So, How Do We Calculate ROCE?
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 Eland Oil & Gas:
0.19 = US$81m ÷ (US$549m - US$130m) (Based on the trailing twelve months to June 2019.)
So, Eland Oil & Gas has an ROCE of 19%.
See our latest analysis for Eland Oil & Gas
Does Eland Oil & Gas Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Eland Oil & Gas's ROCE appears to be substantially greater than the 10% average in the Oil and Gas industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Eland Oil & Gas's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Eland Oil & Gas delivered an ROCE of 19%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. You can see in the image below how Eland Oil & Gas's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Remember that most companies like Eland Oil & Gas are cyclical businesses. Since the future is so important for investors, you should check out our free report on analyst forecasts for Eland Oil & Gas.
What Are Current Liabilities, And How Do They Affect Eland Oil & Gas's ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Eland Oil & Gas has total liabilities of US$130m and total assets of US$549m. Therefore its current liabilities are equivalent to approximately 24% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
What We Can Learn From Eland Oil & Gas's ROCE
With that in mind, Eland Oil & Gas's ROCE appears pretty good. Eland Oil & Gas shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
