Genie Energy Ltd. (NYSE:GNE) Is Employing Capital Very Effectively
Today we'll evaluate Genie Energy Ltd. (NYSE:GNE) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. Generally speaking a higher ROCE is better. 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 Genie Energy:
0.11 = US$9.8m ÷ (US$157m - US$70m) (Based on the trailing twelve months to March 2020.)
So, Genie Energy has an ROCE of 11%.
See our latest analysis for Genie Energy
Does Genie Energy Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Genie Energy's ROCE is meaningfully higher than the 4.7% average in the Electric Utilities 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. Independently of how Genie Energy compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
You can see in the image below how Genie Energy's ROCE compares to its industry. Click to see more on past growth.
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. If Genie Energy is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Genie Energy'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 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.
Genie Energy has current liabilities of US$70m and total assets of US$157m. Therefore its current liabilities are equivalent to approximately 44% of its total assets. With this level of current liabilities, Genie Energy's ROCE is boosted somewhat.
The Bottom Line On Genie Energy's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Genie Energy shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
I will like Genie Energy better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
