U.S. Markets closed

Why South Jersey Industries, Inc.’s (NYSE:SJI) Use Of Investor Capital Doesn’t Look Great

Simply Wall St

Today we'll look at South Jersey Industries, Inc. (NYSE:SJI) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

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. Overall, it is a valuable metric that has its flaws. 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?

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 South Jersey Industries:

0.041 = US$179m ÷ (US$6.0b - US$1.6b) (Based on the trailing twelve months to June 2019.)

So, South Jersey Industries has an ROCE of 4.1%.

View our latest analysis for South Jersey Industries

Is South Jersey Industries's ROCE Good?

One way to assess ROCE is to compare similar companies. We can see South Jersey Industries's ROCE is meaningfully below the Gas Utilities industry average of 5.6%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how South Jersey Industries compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. It is likely that there are more attractive prospects out there.

South Jersey Industries's current ROCE of 4.1% is lower than its ROCE in the past, which was 5.7%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how South Jersey Industries's past growth compares to other companies.

NYSE:SJI Past Revenue and Net Income, October 2nd 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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, 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.

Do South Jersey Industries's Current Liabilities Skew 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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

South Jersey Industries has total assets of US$6.0b and current liabilities of US$1.6b. Therefore its current liabilities are equivalent to approximately 27% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

What We Can Learn From South Jersey Industries's ROCE

That's not a bad thing, however South Jersey Industries has a weak ROCE and may not be an attractive investment. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.