Why We’re Not Keen On Ensign Energy Services Inc.’s (TSE:ESI) 0.006% Return On Capital

Today we’ll look at Ensign Energy Services Inc. (TSE:ESI) and reflect on its potential as an investment. 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 up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

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. 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’.

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 Ensign Energy Services:

0.00006 = CA$236k ÷ (CA$3.7b – CA$276m) (Based on the trailing twelve months to September 2019.)

So, Ensign Energy Services has an ROCE of 0.006%.

View our latest analysis for Ensign Energy Services

Does Ensign Energy Services Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Ensign Energy Services’s ROCE appears to be significantly below the 6.9% average in the Energy Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Ensign Energy Services stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.

Ensign Energy Services delivered an ROCE of 0.006%, 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 Ensign Energy Services’s ROCE compares to its industry. Click to see more on past growth.

TSX:ESI Past Revenue and Net Income, March 2nd 2020
TSX:ESI Past Revenue and Net Income, March 2nd 2020

It is important to remember that ROCE shows past performance, and is 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, after all, simply a snap shot of a single year. Remember that most companies like Ensign Energy Services are cyclical businesses. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Ensign Energy Services.

How Ensign Energy Services’s Current Liabilities Impact 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Ensign Energy Services has total assets of CA$3.7b and current liabilities of CA$276m. Therefore its current liabilities are equivalent to approximately 7.5% of its total assets. With barely any current liabilities, there is minimal impact on Ensign Energy Services’s admittedly low ROCE.

Our Take On Ensign Energy Services’s ROCE

Nonetheless, there may be better places to invest your capital. Of course, you might also be able to find a better stock than Ensign Energy Services. So you may wish to see this free collection of other companies that have grown earnings strongly.

Ensign 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 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.

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