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Here's What Partner Jet Corp.'s (CVE:PJT) ROCE Can Tell Us

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Today we are going to look at Partner Jet Corp. (CVE:PJT) 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.

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

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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'.

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 Partner Jet:

0.091 = CA$252k ÷ (CA$3.5m - CA$746k) (Based on the trailing twelve months to February 2019.)

So, Partner Jet has an ROCE of 9.1%.

View our latest analysis for Partner Jet

Does Partner Jet Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Partner Jet's ROCE is meaningfully better than the 7.0% average in the Airlines industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from how Partner Jet stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.

We can see that , Partner Jet currently has an ROCE of 9.1%, less than the 27% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Partner Jet's ROCE compares to its industry, and you can click it to see more detail on its past growth.

TSXV:PJT Past Revenue and Net Income, July 9th 2019

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Partner Jet is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Partner Jet'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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Partner Jet has total assets of CA$3.5m and current liabilities of CA$746k. As a result, its current liabilities are equal to approximately 21% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

The Bottom Line On Partner Jet's ROCE

With that in mind, we're not overly impressed with Partner Jet's ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than Partner Jet. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.