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Do Whiting Petroleum Corporation’s (NYSE:WLL) Returns On Capital Employed Make The Cut?

Simply Wall St

Today we’ll evaluate Whiting Petroleum Corporation (NYSE:WLL) 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. Then we’ll determine how its current liabilities are affecting its ROCE.

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

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.’

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

Or for Whiting Petroleum:

0.078 = US$560m ÷ (US$7.8b – US$537m) (Based on the trailing twelve months to December 2018.)

So, Whiting Petroleum has an ROCE of 7.8%.

Check out our latest analysis for Whiting Petroleum

Is Whiting Petroleum’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. It appears that Whiting Petroleum’s ROCE is fairly close to the Oil and Gas industry average of 8.4%. Aside from the industry comparison, Whiting Petroleum’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

Whiting Petroleum delivered an ROCE of 7.8%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving.

NYSE:WLL Past Revenue and Net Income, March 8th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. Given the industry it operates in, Whiting Petroleum could be considered cyclical. Since the future is so important for investors, you should check out our free report on analyst forecasts for Whiting Petroleum.

How Whiting Petroleum’s Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Whiting Petroleum has total assets of US$7.8b and current liabilities of US$537m. As a result, its current liabilities are equal to approximately 6.9% of its total assets. Whiting Petroleum reports few current liabilities, which have a negligible impact on its unremarkable ROCE.

Our Take On Whiting Petroleum’s ROCE

Based on this information, Whiting Petroleum appears to be a mediocre business. Of course you might be able to find a better stock than Whiting Petroleum. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.