Want to participate in a research study? Help shape the future of investing tools and earn a $60 gift card!
Today we are going to look at Pioneer Natural Resources Company (NYSE:PXD) 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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 Pioneer Natural Resources:
0.11 = US$1.8b ÷ (US$18b - US$1.8b) (Based on the trailing twelve months to December 2018.)
Therefore, Pioneer Natural Resources has an ROCE of 11%.
Is Pioneer Natural Resources's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Pioneer Natural Resources's ROCE is around the 9.3% average reported by the Oil and Gas industry. Independently of how Pioneer Natural Resources compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
As we can see, Pioneer Natural Resources currently has an ROCE of 11% compared to its ROCE 3 years ago, which was 0.3%. This makes us think the business might be improving.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Given the industry it operates in, Pioneer Natural Resources could be considered cyclical. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Pioneer Natural Resources's ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Pioneer Natural Resources has total assets of US$18b and current liabilities of US$1.8b. Therefore its current liabilities are equivalent to approximately 10% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On Pioneer Natural Resources's ROCE
With that in mind, Pioneer Natural Resources's ROCE appears pretty good. But note: Pioneer Natural Resources may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
I will like Pioneer Natural Resources 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 firstname.lastname@example.org. 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.