How Do Hallador Energy Company’s (NASDAQ:HNRG) Returns On Capital Compare To Peers?

Today we’ll evaluate Hallador Energy Company (NASDAQ:HNRG) 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.

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.

Understanding 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. All else being equal, a better business will have a higher ROCE. 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’.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

Or for Hallador Energy:

0.032 = US$14m ÷ (US$509m – US$68m) (Based on the trailing twelve months to September 2019.)

So, Hallador Energy has an ROCE of 3.2%.

See our latest analysis for Hallador Energy

Is Hallador Energy’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Hallador Energy’s ROCE appears to be significantly below the 9.0% average in the Oil and Gas industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Hallador Energy compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.7% available in government bonds. It is likely that there are more attractive prospects out there.

Hallador Energy’s current ROCE of 3.2% is lower than 3 years ago, when the company reported a 7.5% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Hallador Energy’s past growth compares to other companies.

NasdaqCM:HNRG Past Revenue and Net Income, January 21st 2020
NasdaqCM:HNRG Past Revenue and Net Income, January 21st 2020

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. We note Hallador Energy could be considered a cyclical business. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Hallador Energy.

Do Hallador Energy’s Current Liabilities Skew Its ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Hallador Energy has total liabilities of US$68m and total assets of US$509m. As a result, its current liabilities are equal to approximately 13% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

Our Take On Hallador Energy’s ROCE

While that is good to see, Hallador Energy has a low ROCE and does not look attractive in this analysis. Of course, you might also be able to find a better stock than Hallador Energy. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.