In This Article:
Today we are going to look at Entergy Corporation (NYSE:ETR) 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. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. In general, businesses with a higher ROCE are usually better quality. 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?
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 Entergy:
0.028 = US$1.3b ÷ (US$51b - US$4.5b) (Based on the trailing twelve months to June 2019.)
So, Entergy has an ROCE of 2.8%.
See our latest analysis for Entergy
Is Entergy's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Entergy's ROCE appears meaningfully below the 4.9% average reported by the Electric Utilities industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Entergy's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
Entergy's current ROCE of 2.8% is lower than its ROCE in the past, which was 3.9%, 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Entergy's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.