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Hawaiian Electric Industries, Inc. (NYSE:HE) Might Not Be A Great Investment

Simply Wall St

Today we'll look at Hawaiian Electric Industries, Inc. (NYSE:HE) and reflect on its potential as an investment. 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. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. 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.'

So, How Do We Calculate ROCE?

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 Hawaiian Electric Industries:

0.025 = US$329m ÷ (US$14b - US$542m) (Based on the trailing twelve months to June 2019.)

So, Hawaiian Electric Industries has an ROCE of 2.5%.

See our latest analysis for Hawaiian Electric Industries

Does Hawaiian Electric Industries Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. We can see Hawaiian Electric Industries's ROCE is meaningfully below the Electric Utilities industry average of 4.9%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Hawaiian Electric Industries stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.

You can click on the image below to see (in greater detail) how Hawaiian Electric Industries's past growth compares to other companies.

NYSE:HE Past Revenue and Net Income, August 23rd 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Hawaiian Electric Industries.

Hawaiian Electric Industries's Current Liabilities And Their Impact On 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Hawaiian Electric Industries has total assets of US$14b and current liabilities of US$542m. Therefore its current liabilities are equivalent to approximately 4.0% of its total assets. With barely any current liabilities, there is minimal impact on Hawaiian Electric Industries's admittedly low ROCE.

Our Take On Hawaiian Electric Industries's ROCE

Nonetheless, there may be better places to invest your capital. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like Hawaiian Electric Industries 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 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.