Why PDC Energy, Inc.’s (NASDAQ:PDCE) Use Of Investor Capital Doesn’t Look Great

Today we are going to look at PDC Energy, Inc. (NASDAQ:PDCE) 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.

Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

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

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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 PDC Energy:

0.019 = US$78m ÷ (US$4.5b – US$441m) (Based on the trailing twelve months to December 2018.)

Therefore, PDC Energy has an ROCE of 1.9%.

View our latest analysis for PDC Energy

Is PDC Energy’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. In this analysis, PDC Energy’s ROCE appears meaningfully below the 9.0% average reported by the Oil and Gas industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how PDC 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.

As we can see, PDC Energy currently has an ROCE of 1.9%, less than the 4.1% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.

NasdaqGS:PDCE Past Revenue and Net Income, March 21st 2019
NasdaqGS:PDCE Past Revenue and Net Income, March 21st 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. Given the industry it operates in, PDC Energy could be considered cyclical. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

PDC 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. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.

PDC Energy has total liabilities of US$441m and total assets of US$4.5b. As a result, its current liabilities are equal to approximately 9.7% of its total assets. With barely any current liabilities, there is minimal impact on PDC Energy’s admittedly low ROCE.

The Bottom Line On PDC Energy’s ROCE

Still, investors could probably find more attractive prospects with better performance out there. You might be able to find a better buy than PDC 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).

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