Yahoo Finance Is Tourmaline Oil Corp. (TSE:TOU) Better Than Average At Deploying Capital?
Today we'll evaluate Tourmaline Oil Corp. (TSE:TOU) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 Tourmaline Oil:
0.054 = CA$557m ÷ (CA$11b - CA$581m) (Based on the trailing twelve months to March 2019.)
Therefore, Tourmaline Oil has an ROCE of 5.4%.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Check out our latest analysis for Tourmaline Oil
Is Tourmaline Oil's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Tourmaline Oil's ROCE appears to be around the 6.2% average of the Oil and Gas industry. Aside from the industry comparison, Tourmaline Oil's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Our data shows that Tourmaline Oil currently has an ROCE of 5.4%, compared to its ROCE of 1.1% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. We note Tourmaline Oil could be considered a cyclical business. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Tourmaline Oil'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. 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 counteract this, we check 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$581m. Therefore its current liabilities are equivalent to approximately 5.3% of its total assets. With low levels of current liabilities, at least Tourmaline Oil's mediocre ROCE is not unduly boosted.
What We Can Learn From Tourmaline Oil's ROCE
Based on this information, Tourmaline Oil appears to be a mediocre business. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you are like me, then you will 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.
