Today we'll evaluate OGE Energy Corp. (NYSE:OGE) to determine whether it could have potential as an investment idea. 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.
First of all, we'll work out how to 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.
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. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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 OGE Energy:
0.048 = US$494m ÷ (US$11b - US$697m) (Based on the trailing twelve months to September 2019.)
Therefore, OGE Energy has an ROCE of 4.8%.
Is OGE Energy's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, OGE Energy's ROCE appears to be around the 4.6% average of the Electric Utilities industry. Separate from how OGE Energy stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
You can click on the image below to see (in greater detail) how OGE Energy's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
OGE Energy's Current Liabilities And Their Impact On Its 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
OGE Energy has total liabilities of US$697m and total assets of US$11b. As a result, its current liabilities are equal to approximately 6.3% of its total assets. OGE Energy has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.
The Bottom Line On OGE Energy's ROCE
If performance improves, then OGE Energy may be an OK investment, especially at the right valuation. Of course, you might also be able to find a better stock than OGE Energy. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like OGE Energy better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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