# Do Painted Pony Energy Ltd.’s (TSE:PONY) Returns On Capital Employed Make The Cut?

Today we’ll look at Painted Pony Energy Ltd. (TSE:PONY) and reflect on its potential as an investment. 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, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.

### What is Return On Capital Employed (ROCE)?

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. 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 Painted Pony Energy:

0.064 = CA\$126m ÷ (CA\$2.0b – CA\$53m) (Based on the trailing twelve months to June 2019.)

So, Painted Pony Energy has an ROCE of 6.4%.

### Does Painted Pony Energy Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Painted Pony Energy’s ROCE appears to be around the 6.4% average of the Oil and Gas industry. Aside from the industry comparison, Painted Pony Energy’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

Painted Pony Energy reported an ROCE of 6.4% — better than 3 years ago, when the company didn’t make a profit. That suggests the business has returned to profitability.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. We note Painted Pony 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 Painted Pony Energy.

### Do Painted Pony 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. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

Painted Pony Energy has total assets of CA\$2.0b and current liabilities of CA\$53m. Therefore its current liabilities are equivalent to approximately 2.6% of its total assets. With low levels of current liabilities, at least Painted Pony Energy’s mediocre ROCE is not unduly boosted.

### Our Take On Painted Pony Energy’s ROCE

Painted Pony Energy looks like an ok business, but on this analysis it is not at the top of our buy list. You might be able to find a better investment than Painted Pony Energy. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.