Yahoo Finance Cimarex Energy Co. (NYSE:XEC) Earns Among The Best Returns In Its Industry
Today we are going to look at Cimarex Energy Co. (NYSE:XEC) 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. Then we'll determine how its current liabilities are affecting 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. Overall, it is a valuable metric that has its flaws. 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'.
So, How Do We Calculate ROCE?
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 Cimarex Energy:
0.12 = US$808m ÷ (US$7.6b - US$815m) (Based on the trailing twelve months to June 2019.)
Therefore, Cimarex Energy has an ROCE of 12%.
View our latest analysis for Cimarex Energy
Does Cimarex Energy Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Cimarex Energy's ROCE appears to be substantially greater than the 7.9% average in the Oil and Gas industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Cimarex Energy's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Our data shows that Cimarex Energy currently has an ROCE of 12%, compared to its ROCE of 0.01% 3 years ago. This makes us think the business might be improving. The image below shows how Cimarex Energy's ROCE compares to its industry, and you can click it to see more detail on its 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 only a point-in-time measure. Remember that most companies like Cimarex Energy are cyclical businesses. Since the future is so important for investors, you should check out our free report on analyst forecasts for Cimarex Energy.
What Are Current Liabilities, And How Do They Affect Cimarex Energy's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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.
Cimarex Energy has current liabilities of US$815m and total assets of US$7.6b. As a result, its current liabilities are equal to approximately 11% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
The Bottom Line On Cimarex Energy's ROCE
Overall, Cimarex Energy has a decent ROCE and could be worthy of further research. There might be better investments than Cimarex Energy out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
I will like Cimarex Energy better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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. Thank you for reading.
