Yahoo Finance Is Antero Resources Corporation (NYSE:AR) Struggling With Its 2.3% Return On Capital Employed?
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Today we are going to look at Antero Resources Corporation (NYSE:AR) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, 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.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed 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?
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 Antero Resources:
0.023 = US$764m ÷ (US$16b – US$814m) (Based on the trailing twelve months to September 2018.)
Therefore, Antero Resources has an ROCE of 2.3%.
Check out our latest analysis for Antero Resources
Is Antero Resources’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Antero Resources’s ROCE appears meaningfully below the 6.2% average reported by the Oil and Gas industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Antero Resources stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
Antero Resources’s current ROCE of 2.3% is lower than 3 years ago, when the company reported a 20% ROCE. 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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Given the industry it operates in, Antero Resources could be considered cyclical. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Antero Resources.
Do Antero Resources’s Current Liabilities Skew 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Antero Resources has total assets of US$16b and current liabilities of US$814m. Therefore its current liabilities are equivalent to approximately 5.2% of its total assets. Antero Resources has very few current liabilities, which have a minimal effect on its already low ROCE.
Our Take On Antero Resources’s ROCE
Nonetheless, there may be better places to invest your capital. Of course you might be able to find a better stock than Antero Resources. So you may wish to see this free collection of other companies that have grown earnings strongly.
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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.
