Yahoo Finance Why We’re Not Impressed By Bonterra Energy Corp.’s (TSE:BNE) 1.6% ROCE
Today we'll evaluate Bonterra Energy Corp. (TSE:BNE) 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
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. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
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 Bonterra Energy:
0.016 = CA$16m ÷ (CA$1.1b - CA$46m) (Based on the trailing twelve months to December 2019.)
So, Bonterra Energy has an ROCE of 1.6%.
Check out our latest analysis for Bonterra Energy
Is Bonterra Energy's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Bonterra Energy's ROCE is meaningfully below the Oil and Gas industry average of 5.7%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Bonterra Energy compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.4% available in government bonds. There are potentially more appealing investments elsewhere.
Bonterra Energy delivered an ROCE of 1.6%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Bonterra Energy's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. Given the industry it operates in, Bonterra Energy could be considered cyclical. Since the future is so important for investors, you should check out our free report on analyst forecasts for Bonterra Energy.
Bonterra Energy's Current Liabilities And Their Impact On 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Bonterra Energy has total assets of CA$1.1b and current liabilities of CA$46m. Therefore its current liabilities are equivalent to approximately 4.2% of its total assets. Bonterra Energy has a low level of current liabilities, which have a negligible impact on its already low ROCE.
The Bottom Line On Bonterra Energy's ROCE
Still, investors could probably find more attractive prospects with better performance out there. 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.
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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.
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. Thank you for reading.
