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Is CONSOL Energy Inc.’s (NYSE:CEIX) Return On Capital Employed Any Good?

Simply Wall St
·4 min read

Today we are going to look at CONSOL Energy Inc. (NYSE:CEIX) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting 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. 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?

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 CONSOL Energy:

0.077 = US$178m ÷ (US$2.7b - US$392m) (Based on the trailing twelve months to December 2019.)

Therefore, CONSOL Energy has an ROCE of 7.7%.

View our latest analysis for CONSOL Energy

Is CONSOL Energy's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, CONSOL Energy's ROCE appears to be around the 7.1% average of the Oil and Gas industry. Aside from the industry comparison, CONSOL 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.

In our analysis, CONSOL Energy's ROCE appears to be 7.7%, compared to 3 years ago, when its ROCE was 2.9%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how CONSOL Energy's past growth compares to other companies.

NYSE:CEIX Past Revenue and Net Income, March 18th 2020
NYSE:CEIX Past Revenue and Net Income, March 18th 2020

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. ROCE is only a point-in-time measure. We note CONSOL Energy could be considered a cyclical business. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for CONSOL Energy.

Do CONSOL Energy's Current Liabilities Skew 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 counter this, investors can check if a company has high current liabilities relative to total assets.

CONSOL Energy has total assets of US$2.7b and current liabilities of US$392m. As a result, its current liabilities are equal to approximately 15% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

The Bottom Line On CONSOL Energy's ROCE

That said, CONSOL Energy's ROCE is mediocre, there may be more attractive investments around. You might be able to find a better investment than CONSOL Energy. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.

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.

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. Thank you for reading.