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Should You Care About OGE Energy Corp.’s (NYSE:OGE) Investment Potential?

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Today we are going to look at OGE Energy Corp. (NYSE:OGE) 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 up, we'll look at what ROCE is and how we calculate it. 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 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. Overall, it is a valuable metric that has its flaws. 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'.

How Do You Calculate Return On Capital Employed?

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 OGE Energy:

0.047 = US$460m ÷ (US$11b - US$884m) (Based on the trailing twelve months to March 2019.)

Therefore, OGE Energy has an ROCE of 4.7%.

Check out our latest analysis for OGE Energy

Does OGE Energy Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, OGE Energy's ROCE appears to be around the 4.7% average of the Electric Utilities industry. Independently of how OGE Energy 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.

The image below shows how OGE Energy's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:OGE Past Revenue and Net Income, July 5th 2019
NYSE:OGE Past Revenue and Net Income, July 5th 2019

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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

OGE 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.

OGE Energy has total assets of US$11b and current liabilities of US$884m. Therefore its current liabilities are equivalent to approximately 8.2% of its total assets. OGE Energy has a low level of current liabilities, which have a negligible impact on its already low ROCE.

Our Take On OGE Energy's ROCE

Nevertheless, there are potentially more attractive companies to invest in. Of course, you might also be able to find a better stock than OGE Energy. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like OGE 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.

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