Yahoo Finance Is The New Zealand Refining Company Limited (NZSE:NZR) Struggling With Its 4.7% Return On Capital Employed?
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Today we’ll look at The New Zealand Refining Company Limited (NZSE:NZR) and reflect on its potential as an investment. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
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.
What is 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. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
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 New Zealand Refining:
0.047 = NZ$56m ÷ (NZ$1.4b – NZ$214m) (Based on the trailing twelve months to December 2018.)
So, New Zealand Refining has an ROCE of 4.7%.
See our latest analysis for New Zealand Refining
Is New Zealand Refining’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, New Zealand Refining’s ROCE appears meaningfully below the 7.3% average reported by the Oil and Gas industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how New Zealand Refining 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.
As we can see, New Zealand Refining currently has an ROCE of 4.7%, less than the 19% it reported 3 years ago. So investors might consider if it has had issues recently.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Given the industry it operates in, New Zealand Refining could be considered cyclical. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for New Zealand Refining.
How New Zealand Refining’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.
New Zealand Refining has total assets of NZ$1.4b and current liabilities of NZ$214m. As a result, its current liabilities are equal to approximately 15% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.
Our Take On New Zealand Refining’s ROCE
New Zealand Refining has a poor ROCE, and there may be better investment prospects out there. Of course you might be able to find a better stock than New Zealand Refining. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
