Today we'll evaluate Profire Energy, Inc. (NASDAQ:PFIE) to determine whether it could have potential as an investment idea. 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. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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 Profire Energy:
0.14 = US$6.8m ÷ (US$51m - US$3.7m) (Based on the trailing twelve months to June 2019.)
So, Profire Energy has an ROCE of 14%.
Does Profire Energy Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Profire Energy's ROCE appears to be substantially greater than the 7.5% average in the Energy Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Profire Energy compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Profire Energy delivered an ROCE of 14%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability.
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 only a point-in-time measure. Given the industry it operates in, Profire 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.
Profire 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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Profire Energy has total liabilities of US$3.7m and total assets of US$51m. As a result, its current liabilities are equal to approximately 7.3% of its total assets. In addition to low current liabilities (making a negligible impact on ROCE), Profire Energy earns a sound return on capital employed.
Our Take On Profire Energy's ROCE
If it is able to keep this up, Profire Energy could be attractive. Profire Energy shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
I will like Profire 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 firstname.lastname@example.org. 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.