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Crew Energy Inc. (TSE:CR) Might Not Be A Great Investment

Simply Wall St

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Today we are going to look at Crew Energy Inc. (TSE:CR) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we'll go over how we calculate ROCE. 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. Generally speaking a higher ROCE is better. 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'.

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 Crew Energy:

0.026 = CA$36m ÷ (CA$1.5b - CA$59m) (Based on the trailing twelve months to December 2018.)

So, Crew Energy has an ROCE of 2.6%.

See our latest analysis for Crew Energy

Is Crew Energy's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Crew Energy's ROCE appears to be significantly below the 6.4% average in the Oil and Gas industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how Crew Energy stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.

Crew Energy reported an ROCE of 2.6% -- better than 3 years ago, when the company didn't make a profit. This makes us wonder if the company is improving.

TSX:CR Past Revenue and Net Income, April 3rd 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. We note Crew 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 Crew Energy.

What Are Current Liabilities, And How Do They Affect Crew Energy's ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Crew Energy has total liabilities of CA$59m and total assets of CA$1.5b. As a result, its current liabilities are equal to approximately 4.0% of its total assets. With barely any current liabilities, there is minimal impact on Crew Energy's admittedly low ROCE.

What We Can Learn From Crew Energy's ROCE

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

If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.