Yahoo Finance Why We Like Just Energy Group Inc.’s (TSE:JE) 16% Return On Capital Employed
Today we are going to look at Just Energy Group Inc. (TSE:JE) to see whether it might be an attractive investment prospect. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on 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. Generally speaking a higher ROCE is better. 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?
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 Just Energy Group:
0.16 = CA$118m ÷ (CA$1.7b – CA$887m) (Based on the trailing twelve months to September 2018.)
So, Just Energy Group has an ROCE of 16%.
Check out our latest analysis for Just Energy Group
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Does Just Energy Group Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Just Energy Group’s ROCE is meaningfully better than the 5.6% average in the Integrated Utilities industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Just Energy Group’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Just Energy Group’s current ROCE of 16% is lower than its ROCE in the past, which was 39%, 3 years ago. Therefore we wonder if the company is facing new headwinds.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Just Energy Group.
Just Energy Group’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 the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Just Energy Group has total assets of CA$1.7b and current liabilities of CA$887m. Therefore its current liabilities are equivalent to approximately 53% of its total assets. Just Energy Group has a relatively high level of current liabilities, boosting its ROCE meaningfully.
Our Take On Just Energy Group’s ROCE
This ROCE is pretty good, but remember that it would look less impressive with fewer current liabilities. Of course you might be able to find a better stock than Just Energy Group. 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
