Yahoo Finance Is Cue Energy Resources Limited’s (ASX:CUE) 16% ROCE Any Good?
Today we'll evaluate Cue Energy Resources Limited (ASX:CUE) 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.
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 is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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 Cue Energy Resources:
0.16 = AU$9.0m ÷ (AU$63m - AU$6.2m) (Based on the trailing twelve months to June 2019.)
So, Cue Energy Resources has an ROCE of 16%.
See our latest analysis for Cue Energy Resources
Does Cue Energy Resources Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Cue Energy Resources's ROCE is meaningfully higher than the 11% average in the Oil and Gas industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Cue Energy Resources's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Cue Energy Resources reported an ROCE of 16% -- better than 3 years ago, when the company didn't make a profit. That implies the business has been improving. You can click on the image below to see (in greater detail) how Cue Energy Resources's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. Remember that most companies like Cue Energy Resources are cyclical businesses. You can check if Cue Energy Resources has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Cue Energy Resources's Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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.
Cue Energy Resources has total assets of AU$63m and current liabilities of AU$6.2m. Therefore its current liabilities are equivalent to approximately 9.8% of its total assets. In addition to low current liabilities (making a negligible impact on ROCE), Cue Energy Resources earns a sound return on capital employed.
The Bottom Line On Cue Energy Resources's ROCE
If it is able to keep this up, Cue Energy Resources could be attractive. Cue Energy Resources shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.
