Why We’re Not Keen On President Energy Plc’s (LON:PPC) 4.7% Return On Capital

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Today we’ll look at President Energy Plc (LON:PPC) and reflect on its potential as an investment. 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 of all, we’ll work out how to calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. 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?

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 President Energy:

0.047 = US$8.7m ÷ (US$212m – US$28m) (Based on the trailing twelve months to December 2018.)

Therefore, President Energy has an ROCE of 4.7%.

See our latest analysis for President Energy

Is President Energy’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, President Energy’s ROCE appears meaningfully below the 8.1% average reported by the Oil and Gas industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, President 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.

President Energy reported an ROCE of 4.7% — better than 3 years ago, when the company didn’t make a profit. That suggests the business has returned to profitability.

AIM:PPC Past Revenue and Net Income, May 30th 2019AIM:PPC Past Revenue and Net Income, May 30th 2019

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Given the industry it operates in, President Energy 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 President Energy.

How President Energy’s Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.

President Energy has total liabilities of US$28m and total assets of US$212m. As a result, its current liabilities are equal to approximately 13% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

What We Can Learn From President Energy’s ROCE

With that in mind, we’re not overly impressed with President Energy’s ROCE, so it may not be the most appealing prospect. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

I will like President 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.

Article source: https://finance.yahoo.com/news/why-not-keen-president-energy-120245953.html

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