Today we’ll look at Mammoth Energy Services, Inc. (NASDAQ:TUSK) and reflect on its potential as an investment. 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 measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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’.
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 Mammoth Energy Services:
0.22 = US$204m ÷ (US$1.1b – US$164m) (Based on the trailing twelve months to June 2019.)
So, Mammoth Energy Services has an ROCE of 22%.
Is Mammoth Energy Services’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Mammoth Energy Services’s ROCE is meaningfully better than the 9.8% average in the Energy Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Mammoth Energy Services’s ROCE currently appears to be excellent.
Mammoth Energy Services reported an ROCE of 22% — better than 3 years ago, when the company didn’t make a profit. That implies the business has been improving. The image below shows how Mammoth Energy Services’s ROCE compares to its industry.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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, Mammoth Energy Services 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.
What Are Current Liabilities, And How Do They Affect Mammoth Energy Services’s 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Mammoth Energy Services has total assets of US$1.1b and current liabilities of US$164m. As a result, its current liabilities are equal to approximately 15% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.
Our Take On Mammoth Energy Services’s ROCE
Low current liabilities and high ROCE is a good combination, making Mammoth Energy Services look quite interesting. There might be better investments than Mammoth Energy Services out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
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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.