Today we’ll evaluate Secure Energy Services Inc. (TSE:SES) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.
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 Secure Energy Services:
0.03 = CA$43m ÷ (CA$1.6b – CA$174m) (Based on the trailing twelve months to September 2019.)
Therefore, Secure Energy Services has an ROCE of 3.0%.
Is Secure Energy Services’s ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Secure Energy Services’s ROCE is meaningfully below the Energy Services industry average of 7.6%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how Secure Energy Services stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
Secure Energy Services delivered an ROCE of 3.0%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability. You can see in the image below how Secure Energy Services’s ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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. ROCE is only a point-in-time measure. Given the industry it operates in, Secure Energy Services 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 Secure Energy Services.
Do Secure Energy Services’s Current Liabilities Skew 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. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Secure Energy Services has total liabilities of CA$174m and total assets of CA$1.6b. As a result, its current liabilities are equal to approximately 11% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.
The Bottom Line On Secure Energy Services’s ROCE
That’s not a bad thing, however Secure Energy Services has a weak ROCE and may not be an attractive investment. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
Secure Energy Services 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 firstname.lastname@example.org. 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.
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