In This Article:
Today we'll evaluate CenterPoint Energy, Inc. (NYSE:CNP) to determine whether it could have potential as an investment idea. 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. 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 CenterPoint Energy:
0.034 = US$1.1b ÷ (US$34b - US$3.0b) (Based on the trailing twelve months to June 2019.)
So, CenterPoint Energy has an ROCE of 3.4%.
Check out our latest analysis for CenterPoint Energy
Is CenterPoint Energy's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, CenterPoint Energy's ROCE appears to be significantly below the 4.9% average in the Integrated Utilities industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how CenterPoint Energy stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
CenterPoint Energy's current ROCE of 3.4% is lower than 3 years ago, when the company reported a 4.9% ROCE. Therefore we wonder if the company is facing new headwinds. The image below shows how CenterPoint Energy's ROCE compares to its industry, and you can click it to see more detail on its 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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for CenterPoint Energy.