Yahoo Finance Are Cenovus Energy Inc.’s (TSE:CVE) Returns Worth Your While?
Today we are going to look at Cenovus Energy Inc. (TSE:CVE) 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.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
What is 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. 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 Cenovus Energy:
0.048 = CA$1.6b ÷ (CA$36b - CA$2.5b) (Based on the trailing twelve months to December 2019.)
So, Cenovus Energy has an ROCE of 4.8%.
View our latest analysis for Cenovus Energy
Is Cenovus Energy's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Cenovus Energy's ROCE is around the 5.3% average reported by the Oil and Gas industry. Setting aside the industry comparison for now, Cenovus Energy's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
Cenovus Energy has an ROCE of 4.8%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving. You can see in the image below how Cenovus Energy's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and 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. We note Cenovus Energy could be considered a cyclical business. Since the future is so important for investors, you should check out our free report on analyst forecasts for Cenovus Energy.
Cenovus Energy's Current Liabilities And Their Impact On 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Cenovus Energy has total assets of CA$36b and current liabilities of CA$2.5b. As a result, its current liabilities are equal to approximately 7.1% of its total assets. With low levels of current liabilities, at least Cenovus Energy's mediocre ROCE is not unduly boosted.
The Bottom Line On Cenovus Energy's ROCE
Based on this information, Cenovus Energy appears to be a mediocre business. You might be able to find a better investment than Cenovus Energy. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
Cenovus 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.
