Is Cheniere Energy, Inc.’s (NYSEMKT:LNG) Return On Capital Employed Any Good?

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Today we are going to look at Cheniere Energy, Inc. (NYSEMKT:LNG) to see whether it might be an attractive investment prospect. 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. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

What is 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. 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.'

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 Cheniere Energy:

0.066 = US$1.4b ÷ (US$31b - US$1.4b) (Based on the trailing twelve months to September 2018.)

Therefore, Cheniere Energy has an ROCE of 6.6%.

View our latest analysis for Cheniere Energy

Is Cheniere Energy's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Cheniere Energy's ROCE appears to be around the 6.1% average of the Oil and Gas industry. Aside from the industry comparison, Cheniere Energy's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

Cheniere Energy reported an ROCE of 6.6% -- better than 3 years ago, when the company didn't make a profit. This makes us wonder if the company is improving.

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Given the industry it operates in, Cheniere Energy could be considered cyclical. What happens in the future is pretty important for investors, so we have prepared a freereport on analyst forecasts for Cheniere Energy.

Cheniere Energy's Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Cheniere Energy has total liabilities of US$1.4b and total assets of US$31b. As a result, its current liabilities are equal to approximately 4.4% of its total assets. With low levels of current liabilities, at least Cheniere Energy's mediocre ROCE is not unduly boosted.

What We Can Learn From Cheniere Energy's ROCE

If performance improves, then Cheniere Energy may be an OK investment, especially at the right valuation. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this freelist of companies with modest (or no) debt, trading on a P/E below 20.

If you like to buy stocks alongside management, then you might just love this freelist of companies. (Hint: insiders have been buying them).

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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.