Is Abraxas Petroleum Corporation’s (NASDAQ:AXAS) 19% ROCE Any Good?

Today we are going to look at Abraxas Petroleum Corporation (NASDAQ:AXAS) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding 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. 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.

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 Abraxas Petroleum:

0.19 = US$71m ÷ (US$441m - US$59m) (Based on the trailing twelve months to September 2019.)

Therefore, Abraxas Petroleum has an ROCE of 19%.

View our latest analysis for Abraxas Petroleum

Is Abraxas Petroleum's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Abraxas Petroleum's ROCE is meaningfully better than the 7.7% average in the Oil and Gas industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Abraxas Petroleum compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

Abraxas Petroleum delivered an ROCE of 19%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Abraxas Petroleum's past growth compares to other companies.

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. ROCE is, after all, simply a snap shot of a single year. We note Abraxas Petroleum 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 Abraxas Petroleum.

Do Abraxas Petroleum's Current Liabilities Skew Its 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 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Abraxas Petroleum has total assets of US$441m and current liabilities of US$59m. As a result, its current liabilities are equal to approximately 13% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

The Bottom Line On Abraxas Petroleum's ROCE

Overall, Abraxas Petroleum has a decent ROCE and could be worthy of further research. Abraxas Petroleum 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.

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

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.