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Here’s What CVR Energy, Inc.’s (NYSE:CVI) ROCE Can Tell Us

Michael Crabtree

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Today we’ll look at CVR Energy, Inc. (NYSE:CVI) and reflect on its potential as an investment. 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. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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?

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 CVR Energy:

0.12 = US$108m ÷ (US$4.0b – US$604m) (Based on the trailing twelve months to September 2018.)

Therefore, CVR Energy has an ROCE of 12%.

See our latest analysis for CVR Energy

Is CVR Energy’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that CVR Energy’s ROCE is meaningfully better than the 6.2% average in the Oil and Gas industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how CVR Energy compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

NYSE:CVI Last Perf February 14th 19

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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 CVR Energy could be considered a cyclical business. Since the future is so important for investors, you should check out our free report on analyst forecasts for CVR Energy.

Do CVR Energy’s Current Liabilities Skew Its 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.

CVR Energy has total liabilities of US$604m and total assets of US$4.0b. As a result, its current liabilities are equal to approximately 15% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

Our Take On CVR Energy’s ROCE

With that in mind, CVR Energy’s ROCE appears pretty good. Of course you might be able to find a better stock than CVR Energy. So you may wish to see this free collection of other companies that have grown earnings strongly.

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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.