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Why We Like SilverBow Resources, Inc.’s (NYSE:SBOW) 19% Return On Capital Employed

Simply Wall St

Today we'll look at SilverBow Resources, Inc. (NYSE:SBOW) and reflect on its potential as an investment. 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 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.

Understanding Return On Capital Employed (ROCE)

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. In brief, it is a useful tool, but it is not without drawbacks. 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 SilverBow Resources:

0.19 = US$158m ÷ (US$921m - US$84m) (Based on the trailing twelve months to June 2019.)

Therefore, SilverBow Resources has an ROCE of 19%.

Check out our latest analysis for SilverBow Resources

Does SilverBow Resources Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. SilverBow Resources's ROCE appears to be substantially greater than the 8.3% average in the Oil and Gas industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how SilverBow Resources compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

SilverBow Resources reported an ROCE of 19% -- better than 3 years ago, when the company didn't make a profit. This makes us wonder if the company is improving. You can see in the image below how SilverBow Resources's ROCE compares to its industry. Click to see more on past growth.

NYSE:SBOW Past Revenue and Net Income, October 15th 2019

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. We note SilverBow Resources could be considered a cyclical business. Since the future is so important for investors, you should check out our free report on analyst forecasts for SilverBow Resources.

SilverBow Resources'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.

SilverBow Resources has total assets of US$921m and current liabilities of US$84m. Therefore its current liabilities are equivalent to approximately 9.1% of its total assets. Low current liabilities have only a minimal impact on SilverBow Resources's ROCE, making its decent returns more credible.

Our Take On SilverBow Resources's ROCE

If it is able to keep this up, SilverBow Resources could be attractive. SilverBow Resources looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

SilverBow Resources is not the only stock insiders are buying. So take a peek at this free list of growing companies with 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.