Are NuVista Energy Ltd.’s (TSE:NVA) Returns On Investment Worth Your While?

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Today we are going to look at NuVista Energy Ltd. (TSE:NVA) to see whether it might be an attractive investment prospect. 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, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its 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?

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 NuVista Energy:

0.064 = CA$136m ÷ (CA$2.2b – CA$110m) (Based on the trailing twelve months to March 2019.)

So, NuVista Energy has an ROCE of 6.4%.

Check out our latest analysis for NuVista Energy

Is NuVista Energy’s ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, NuVista Energy’s ROCE appears to be around the 5.4% average of the Oil and Gas industry. Setting aside the industry comparison for now, NuVista 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.

NuVista Energy delivered an ROCE of 6.4%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability.

TSX:NVA Past Revenue and Net Income, June 3rd 2019
TSX:NVA Past Revenue and Net Income, June 3rd 2019

It is important to remember that ROCE shows past performance, and is 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, NuVista Energy could be considered cyclical. Since the future is so important for investors, you should check out our free report on analyst forecasts for NuVista Energy.

Do NuVista Energy’s Current Liabilities Skew 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

NuVista Energy has total liabilities of CA$110m and total assets of CA$2.2b. Therefore its current liabilities are equivalent to approximately 4.9% of its total assets. NuVista Energy reports few current liabilities, which have a negligible impact on its unremarkable ROCE.

The Bottom Line On NuVista Energy’s ROCE

Based on this information, NuVista Energy appears to be a mediocre business. 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.

I will like NuVista 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.