Why Hallador Energy Company’s (NASDAQ:HNRG) Return On Capital Employed Looks Uninspiring

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Today we’ll evaluate Hallador Energy Company (NASDAQ:HNRG) to determine whether it could have potential as an investment idea. 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. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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’.

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 Hallador Energy:

0.044 = US$26m ÷ (US$526m – US$50m) (Based on the trailing twelve months to September 2018.)

Therefore, Hallador Energy has an ROCE of 4.4%.

View our latest analysis for Hallador Energy

Is Hallador Energy’s ROCE Good?

One way to assess ROCE is to compare similar companies. We can see Hallador Energy’s ROCE is meaningfully below the Oil and Gas industry average of 6.2%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Hallador Energy compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. It is likely that there are more attractive prospects out there.

Hallador Energy’s current ROCE of 4.4% is lower than its ROCE in the past, which was 11%, 3 years ago. So investors might consider if it has had issues recently.

NASDAQCM:HNRG Last Perf February 13th 19
NASDAQCM:HNRG Last Perf February 13th 19

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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, Hallador Energy could be considered cyclical. Since the future is so important for investors, you should check out our free report on analyst forecasts for Hallador Energy.

Do Hallador Energy’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 counter this, investors can check if a company has high current liabilities relative to total assets.

Hallador Energy has total assets of US$526m and current liabilities of US$50m. As a result, its current liabilities are equal to approximately 9.5% of its total assets. Hallador Energy has a low level of current liabilities, which have a negligible impact on its already low ROCE.

The Bottom Line On Hallador Energy’s ROCE

Still, investors could probably find more attractive prospects with better performance out there. Of course you might be able to find a better stock than Hallador Energy. So you may wish to see this free collection of other companies that have grown earnings strongly.

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To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.