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Ensign Energy Services Inc.’s (TSE:ESI) Investment Returns Are Lagging Its Industry

Simply Wall St

Today we are going to look at Ensign Energy Services Inc. (TSE:ESI) 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.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

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.

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 Ensign Energy Services:

0.00006 = CA$236k ÷ (CA$3.7b - CA$276m) (Based on the trailing twelve months to September 2019.)

Therefore, Ensign Energy Services has an ROCE of 0.006%.

Check out our latest analysis for Ensign Energy Services

Is Ensign Energy Services's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Ensign Energy Services's ROCE appears to be significantly below the 7.6% average in the Energy Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Ensign Energy Services 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.

Ensign Energy Services reported an ROCE of 0.006% -- better than 3 years ago, when the company didn't make a profit. This makes us wonder if the company is improving. You can see in the image below how Ensign Energy Services's ROCE compares to its industry. Click to see more on past growth.

TSX:ESI Past Revenue and Net Income, January 18th 2020

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, after all, simply a snap shot of a single year. Remember that most companies like Ensign Energy Services are cyclical businesses. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Ensign Energy Services.

Do Ensign Energy Services's Current Liabilities Skew Its ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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.

Ensign Energy Services has total liabilities of CA$276m and total assets of CA$3.7b. Therefore its current liabilities are equivalent to approximately 7.5% of its total assets. With barely any current liabilities, there is minimal impact on Ensign Energy Services's admittedly low ROCE.

The Bottom Line On Ensign Energy Services's ROCE

Nonetheless, there may be better places to invest your capital. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

Ensign Energy Services is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.