Yahoo Finance Do Tourmaline Oil Corp.’s (TSE:TOU) Returns On Capital Employed Make The Cut?
Today we'll evaluate Tourmaline Oil Corp. (TSE:TOU) 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.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared 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 amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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 Tourmaline Oil:
0.056 = CA$592m ÷ (CA$11b - CA$366m) (Based on the trailing twelve months to June 2019.)
Therefore, Tourmaline Oil has an ROCE of 5.6%.
View our latest analysis for Tourmaline Oil
Does Tourmaline Oil Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Tourmaline Oil's ROCE is fairly close to the Oil and Gas industry average of 5.6%. Separate from how Tourmaline Oil stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
Tourmaline Oil has an ROCE of 5.6%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That suggests the business has returned to profitability. You can see in the image below how Tourmaline Oil's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. We note Tourmaline Oil could be considered a cyclical business. Since the future is so important for investors, you should check out our free report on analyst forecasts for Tourmaline Oil.
How Tourmaline Oil'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Tourmaline Oil has total assets of CA$11b and current liabilities of CA$366m. As a result, its current liabilities are equal to approximately 3.4% of its total assets. With low levels of current liabilities, at least Tourmaline Oil's mediocre ROCE is not unduly boosted.
Our Take On Tourmaline Oil's ROCE
Tourmaline Oil looks like an ok business, but on this analysis it is not at the top of our buy list. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.
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.
