Why We’re Not Keen On Bonterra Energy Corp’s (TSE:BNE) 2.8% Return On Capital

Today we’ll evaluate Bonterra Energy Corp (TSE:BNE) to determine whether it could have potential as an investment idea. 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 up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting 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. All else being equal, a better business will have a higher ROCE. 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?

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 Bonterra Energy:

0.028 = CA$30m ÷ (CA$1.1b – CA$42m) (Based on the trailing twelve months to December 2018.)

So, Bonterra Energy has an ROCE of 2.8%.

See our latest analysis for Bonterra Energy

Is Bonterra Energy’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Bonterra Energy’s ROCE appears to be significantly below the 5.6% average in the Oil and Gas industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Bonterra Energy’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.

Our data shows that Bonterra Energy currently has an ROCE of 2.8%, compared to its ROCE of 1.2% 3 years ago. This makes us wonder if the company is improving.

TSX:BNE Past Revenue and Net Income, March 15th 2019
TSX:BNE Past Revenue and Net Income, March 15th 2019

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. ROCE is only a point-in-time measure. We note Bonterra Energy could be considered a cyclical business. Since the future is so important for investors, you should check out our free report on analyst forecasts for Bonterra Energy.

What Are Current Liabilities, And How Do They Affect Bonterra Energy’s 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Bonterra Energy has total liabilities of CA$42m and total assets of CA$1.1b. As a result, its current liabilities are equal to approximately 3.8% of its total assets. Bonterra Energy has very few current liabilities, which have a minimal effect on its already low ROCE.

Our Take On Bonterra Energy’s ROCE

Nevertheless, there are potentially more attractive companies to invest in. Of course you might be able to find a better stock than Bonterra Energy. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.