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Today we'll evaluate Gulfport Energy Corporation (NASDAQ:GPOR) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the 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.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its 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'.
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 Gulfport Energy:
0.071 = US$393m ÷ (US$6.1b - US$539m) (Based on the trailing twelve months to December 2018.)
Therefore, Gulfport Energy has an ROCE of 7.1%.
See our latest analysis for Gulfport Energy
Does Gulfport Energy Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Gulfport Energy's ROCE appears to be significantly below the 9.1% average in the Oil and Gas industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, Gulfport Energy's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
In our analysis, Gulfport Energy's ROCE appears to be 7.1%, compared to 3 years ago, when its ROCE was 3.5%. This makes us think about whether the company has been reinvesting shrewdly.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Remember that most companies like Gulfport Energy are cyclical businesses. Since the future is so important for investors, you should check out our free report on analyst forecasts for Gulfport Energy.