Yahoo Finance Here’s What WPX Energy, Inc.’s (NYSE:WPX) Return On Capital Can Tell Us
Today we'll evaluate WPX Energy, Inc. (NYSE:WPX) to determine whether it could have potential as an investment idea. 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.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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. 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 WPX Energy:
0.10 = US$807m ÷ (US$8.6b - US$930m) (Based on the trailing twelve months to September 2019.)
So, WPX Energy has an ROCE of 10%.
See our latest analysis for WPX Energy
Is WPX Energy's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, WPX Energy's ROCE appears to be around the 9.0% average of the Oil and Gas industry. Regardless of where WPX Energy sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
WPX Energy delivered an ROCE of 10%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. You can see in the image below how WPX Energy'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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Remember that most companies like WPX Energy are cyclical businesses. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for WPX Energy.
How WPX Energy's Current Liabilities Impact Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
WPX Energy has current liabilities of US$930m and total assets of US$8.6b. Therefore its current liabilities are equivalent to approximately 11% of its total assets. Low current liabilities are not boosting the ROCE too much.
What We Can Learn From WPX Energy's ROCE
Overall, WPX Energy has a decent ROCE and could be worthy of further research. WPX Energy 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.
WPX Energy is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.
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.
