Should You Care About IDACORP, Inc.’s (NYSE:IDA) Investment Potential?
Today we’ll look at IDACORP, Inc. (NYSE:IDA) 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, 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.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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?
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 IDACORP:
0.05 = US$304m ÷ (US$6.3b – US$250m) (Based on the trailing twelve months to September 2018.)
So, IDACORP has an ROCE of 5.0%.
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Does IDACORP Have A Good ROCE?
One way to assess ROCE is to compare similar companies. It appears that IDACORP’s ROCE is fairly close to the Electric Utilities industry average of 5.0%. Independently of how IDACORP compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. There are potentially more appealing investments elsewhere.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for IDACORP.
How IDACORP’s Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
IDACORP has total liabilities of US$250m and total assets of US$6.3b. As a result, its current liabilities are equal to approximately 4.0% of its total assets. IDACORP has a low level of current liabilities, which have a negligible impact on its already low ROCE.
The Bottom Line On IDACORP’s ROCE
Nevertheless, there are potentially more attractive companies to invest in. But note: IDACORP may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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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.
