How Do Pulse Oil Corp.’s (CVE:PUL) Returns On Capital Compare To Peers?
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Today we are going to look at Pulse Oil Corp. (CVE:PUL) 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.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. 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 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 Pulse Oil:
0.0051 = CA$101k ÷ (CA$24m - CA$3.7m) (Based on the trailing twelve months to December 2018.)
Therefore, Pulse Oil has an ROCE of 0.5%.
View our latest analysis for Pulse Oil
Is Pulse Oil's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Pulse Oil's ROCE appears to be significantly below the 6.0% average in the Oil and Gas industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Pulse Oil's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
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 only a point-in-time measure. Remember that most companies like Pulse Oil are cyclical businesses. How cyclical is Pulse Oil? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Pulse Oil'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. 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.
Pulse Oil has total assets of CA$24m and current liabilities of CA$3.7m. Therefore its current liabilities are equivalent to approximately 15% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
Our Take On Pulse Oil's ROCE
That's not a bad thing, however Pulse Oil has a weak ROCE and may not be an attractive investment. 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).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
