Today we are going to look at Ranger Energy Services, Inc. (NYSE:RNGR) 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. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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?
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 Ranger Energy Services:
0.054 = US$14m ÷ (US$324m - US$66m) (Based on the trailing twelve months to March 2019.)
Therefore, Ranger Energy Services has an ROCE of 5.4%.
Is Ranger Energy Services's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Ranger Energy Services's ROCE appears to be significantly below the 8.9% average in the Energy Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Ranger Energy Services'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.
Ranger Energy Services reported an ROCE of 5.4% -- better than 3 years ago, when the company didn't make a profit. That suggests the business has returned to profitability. You can see in the image below how Ranger Energy Services's ROCE compares to its industry. Click to see more on past growth.
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 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 Ranger 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 Ranger Energy Services.
What Are Current Liabilities, And How Do They Affect Ranger Energy Services'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Ranger Energy Services has total liabilities of US$66m and total assets of US$324m. Therefore its current liabilities are equivalent to approximately 21% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.
Our Take On Ranger Energy Services's ROCE
That's not a bad thing, however Ranger Energy Services has a weak ROCE and may not be an attractive investment. Of course, you might also be able to find a better stock than Ranger Energy Services. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Ranger Energy Services 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 email@example.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.