Do Enbridge Inc.’s (TSE:ENB) Returns On Capital Employed Make The Cut?
Today we are going to look at Enbridge Inc. (TSE:ENB) 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. 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 amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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?
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 Enbridge:
0.049 = CA$7.5b ÷ (CA$167b - CA$13b) (Based on the trailing twelve months to March 2019.)
Therefore, Enbridge has an ROCE of 4.9%.
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Does Enbridge Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see Enbridge's ROCE is around the 5.9% average reported by the Oil and Gas industry. Putting aside Enbridge's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Remember that most companies like Enbridge are cyclical businesses. Since the future is so important for investors, you should check out our free report on analyst forecasts for Enbridge.
What Are Current Liabilities, And How Do They Affect Enbridge's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Enbridge has total liabilities of CA$13b and total assets of CA$167b. As a result, its current liabilities are equal to approximately 7.9% of its total assets. Enbridge has very few current liabilities, which have a minimal effect on its already low ROCE.
What We Can Learn From Enbridge's ROCE
Nevertheless, there are potentially more attractive companies to invest in. You might be able to find a better investment than Enbridge. 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).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
