Hallador Energy (NASDAQ:HNRG) Could Be Struggling To Allocate Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Hallador Energy (NASDAQ:HNRG) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Hallador Energy:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.016 = US$4.9m ÷ (US$384m - US$71m) (Based on the trailing twelve months to December 2020).

Thus, Hallador Energy has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 8.7%.

See our latest analysis for Hallador Energy

In the above chart we have measured Hallador Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hallador Energy.

What The Trend Of ROCE Can Tell Us

The trend of ROCE at Hallador Energy is showing some signs of weakness. The company used to generate 9.1% on its capital five years ago but it has since fallen noticeably. In addition to that, Hallador Energy is now employing 36% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

In Conclusion...

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Long term shareholders who've owned the stock over the last five years have experienced a 50% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 4 warning signs for Hallador Energy (2 are concerning) you should be aware of.

While Hallador Energy may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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