Yahoo Finance RPC, Inc. (NYSE:RES) Earns A Nice Return On Capital Employed
Today we'll look at RPC, Inc. (NYSE:RES) 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.
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.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
So, How Do We Calculate ROCE?
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 RPC:
0.13 = US$142m ÷ (US$1.2b - US$164m) (Based on the trailing twelve months to March 2019.)
Therefore, RPC has an ROCE of 13%.
View our latest analysis for RPC
Does RPC Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that RPC's ROCE is meaningfully better than the 8.9% 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 RPC's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
RPC reported an ROCE of 13% -- better than 3 years ago, when the company didn't make a profit. That implies the business has been improving. The image below shows how RPC's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is 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, after all, simply a snap shot of a single year. Remember that most companies like RPC are cyclical businesses. Since the future is so important for investors, you should check out our free report on analyst forecasts for RPC.
RPC's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
RPC has total liabilities of US$164m and total assets of US$1.2b. Therefore its current liabilities are equivalent to approximately 13% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On RPC's ROCE
This is good to see, and with a sound ROCE, RPC could be worth a closer look. RPC looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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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.
