Are Orbit Garant Drilling Inc.’s Returns On Capital Worth Investigating?
Today we'll look at Orbit Garant Drilling Inc. (TSE:OGD) 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared 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 measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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'.
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 Orbit Garant Drilling:
0.03 = CA$3.1m ÷ (CA$134m - CA$28m) (Based on the trailing twelve months to March 2019.)
Therefore, Orbit Garant Drilling has an ROCE of 3.0%.
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Does Orbit Garant Drilling Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. It appears that Orbit Garant Drilling's ROCE is fairly close to the Metals and Mining industry average of 2.8%. Regardless of how Orbit Garant Drilling stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
Orbit Garant Drilling reported an ROCE of 3.0% -- better than 3 years ago, when the company didn't make a profit. That implies the business has been improving.
When considering this metric, keep in mind that it is backwards looking, and 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. ROCE is only a point-in-time measure. Given the industry it operates in, Orbit Garant Drilling could be considered cyclical. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Orbit Garant Drilling's Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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.
Orbit Garant Drilling has total assets of CA$134m and current liabilities of CA$28m. As a result, its current liabilities are equal to approximately 21% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.
Our Take On Orbit Garant Drilling's ROCE
While that is good to see, Orbit Garant Drilling has a low ROCE and does not look attractive in this analysis. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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.
