Why You Should Like Liberty Oilfield Services Inc.’s (NYSE:LBRT) ROCE
Today we are going to look at Liberty Oilfield Services Inc. (NYSE:LBRT) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. All else being equal, a better business will have a higher ROCE. 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?
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 Liberty Oilfield Services:
0.21 = US$216m ÷ (US$1.3b - US$271m) (Based on the trailing twelve months to June 2019.)
Therefore, Liberty Oilfield Services has an ROCE of 21%.
View our latest analysis for Liberty Oilfield Services
Is Liberty Oilfield Services's ROCE Good?
One way to assess ROCE is to compare similar companies. In our analysis, Liberty Oilfield Services's ROCE is meaningfully higher than the 7.7% average in the Energy Services industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Putting aside its position relative to its industry for now, in absolute terms, Liberty Oilfield Services's ROCE is currently very good.
Liberty Oilfield Services has an ROCE of 21%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving. You can see in the image below how Liberty Oilfield Services's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is 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 Liberty Oilfield Services are cyclical businesses. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Liberty Oilfield Services.
How Liberty Oilfield Services's Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Liberty Oilfield Services has total assets of US$1.3b and current liabilities of US$271m. Therefore its current liabilities are equivalent to approximately 21% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
What We Can Learn From Liberty Oilfield Services's ROCE
With low current liabilities and a high ROCE, Liberty Oilfield Services could be worthy of further investigation. There might be better investments than Liberty Oilfield Services out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
I will like Liberty Oilfield Services 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.
