What Does Duke Energy Corporation’s (NYSE:DUK) 4.0% ROCE Say About The Business?
Today we'll evaluate Duke Energy Corporation (NYSE:DUK) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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.
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 Duke Energy:
0.04 = US$5.7b ÷ (US$159b - US$15b) (Based on the trailing twelve months to December 2019.)
Therefore, Duke Energy has an ROCE of 4.0%.
See our latest analysis for Duke Energy
Is Duke Energy's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Duke Energy's ROCE appears to be around the 4.8% average of the Electric Utilities industry. Regardless of how Duke Energy stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
The image below shows how Duke Energy's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Duke Energy.
Do Duke 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 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.
Duke Energy has total assets of US$159b and current liabilities of US$15b. Therefore its current liabilities are equivalent to approximately 9.3% of its total assets. Duke Energy has a low level of current liabilities, which have a negligible impact on its already low ROCE.
Our Take On Duke Energy's ROCE
Nonetheless, there may be better places to invest your capital. Of course, you might also be able to find a better stock than Duke 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.
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.
