Is Secure Energy Services Inc. (TSE:SES) Investing Your Capital Efficiently?

Is Secure Energy Services Inc. (TSE:SES) Investing Your Capital Efficiently?

TSE:SES) to see whether it might be an attractive investment prospect. 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.” data-reactid=”27″>Today we are going to look at Secure Energy Services Inc. (TSE:SES) to see whether it might be an attractive investment prospect. 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. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.” data-reactid=”30″>ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the 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.

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

Or for Secure Energy Services:

0.03 = CA$43m ÷ (CA$1.6b – CA$174m) (Based on the trailing twelve months to September 2019.)

Is Secure Energy Services’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Secure Energy Services’s ROCE is meaningfully below the Energy Services industry average of 7.6%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Secure Energy Services’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.

Secure Energy Services delivered an ROCE of 3.0%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. You can see in the image below how Secure Energy Services’s ROCE compares to its industry. Click to see more on past growth.

TSX:SES Past Revenue and Net Income, December 13th 2019

Do Secure Energy Services’s Current Liabilities Skew 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Secure Energy Services has total liabilities of CA$174m and total assets of CA$1.6b. As a result, its current liabilities are equal to approximately 11% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

The Bottom Line On Secure Energy Services’s ROCE

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