Is SBM Offshore N.V.’s (AMS:SBMO) 8.6% Return On Capital Employed Good News?

Today we'll look at SBM Offshore N.V. (AMS:SBMO) and reflect on its potential as an investment. 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, we'll go over how we calculate ROCE. 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 measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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 SBM Offshore:

0.086 = US$737m ÷ (US$10b - US$1.7b) (Based on the trailing twelve months to December 2019.)

So, SBM Offshore has an ROCE of 8.6%.

See our latest analysis for SBM Offshore

Is SBM Offshore's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. It appears that SBM Offshore's ROCE is fairly close to the Energy Services industry average of 7.4%. Independently of how SBM Offshore compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

In our analysis, SBM Offshore's ROCE appears to be 8.6%, compared to 3 years ago, when its ROCE was 6.4%. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how SBM Offshore's ROCE compares to its industry, and you can click it to see more detail on its past growth.

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. We note SBM Offshore 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 SBM Offshore.

Do SBM Offshore'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.

SBM Offshore has current liabilities of US$1.7b and total assets of US$10b. As a result, its current liabilities are equal to approximately 17% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

The Bottom Line On SBM Offshore's ROCE

This is good to see, and with a sound ROCE, SBM Offshore could be worth a closer look. SBM Offshore looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

I will like SBM Offshore better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, 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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