# What We Think Of Painted Pony Energy Ltd.’s (TSE:PONY) Investment Potential

Today we’ll evaluate Painted Pony Energy Ltd. (TSE:PONY) to determine whether it could have potential as an investment idea. 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. Second, we’ll look at its ROCE compared 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 measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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.’

### How Do You Calculate Return On Capital Employed?

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 Painted Pony Energy:

0.048 = CA\$96m ÷ (CA\$2.1b – CA\$60m) (Based on the trailing twelve months to December 2018.)

So, Painted Pony Energy has an ROCE of 4.8%.

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

One way to assess ROCE is to compare similar companies. Using our data, Painted Pony Energy’s ROCE appears to be around the 5.2% average of the Oil and Gas industry. Independently of how Painted Pony Energy compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.9% available in government bonds. There are potentially more appealing investments elsewhere.

Painted Pony Energy has an ROCE of 4.8%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. That suggests the business has returned to profitability.

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Given the industry it operates in, Painted Pony Energy 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 Painted Pony Energy.

### Painted Pony Energy’s Current Liabilities And Their Impact On 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Painted Pony Energy has total liabilities of CA\$60m and total assets of CA\$2.1b. Therefore its current liabilities are equivalent to approximately 2.9% of its total assets. Painted Pony Energy has a low level of current liabilities, which have a negligible impact on its already low ROCE.

### The Bottom Line On Painted Pony Energy’s ROCE

Nonetheless, there may be better places to invest your capital. You might be able to find a better buy 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).

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.