Yahoo Finance Here's What Enerflex Ltd.'s (TSE:EFX) ROCE Can Tell Us
Today we'll evaluate Enerflex Ltd. (TSE:EFX) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
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 Enerflex:
0.098 = CA$171m ÷ (CA$2.3b - CA$591m) (Based on the trailing twelve months to June 2019.)
Therefore, Enerflex has an ROCE of 9.8%.
See our latest analysis for Enerflex
Does Enerflex Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, Enerflex's ROCE is meaningfully higher than the 7.3% average in the Energy Services 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 Enerflex stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
We can see that , Enerflex currently has an ROCE of 9.8% compared to its ROCE 3 years ago, which was 5.3%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Enerflex's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. We note Enerflex could be considered a cyclical business. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Enerflex.
How Enerflex's Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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.
Enerflex has total liabilities of CA$591m and total assets of CA$2.3b. Therefore its current liabilities are equivalent to approximately 25% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.
The Bottom Line On Enerflex's ROCE
With that in mind, we're not overly impressed with Enerflex's ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than Enerflex. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
