If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Hallador Energy (NASDAQ:HNRG), we weren't too hopeful.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Hallador Energy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.014 = US$4.2m ÷ (US$384m – US$78m) (Based on the trailing twelve months to March 2021).
Therefore, Hallador Energy has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 7.8%.
In the above chart we have measured Hallador Energy's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Hallador Energy's ROCE Trending?
We are a bit anxious about the trends of ROCE at Hallador Energy. The company used to generate 8.5% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 39% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 20%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.4%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
The Bottom Line On Hallador Energy's ROCE
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Investors haven't taken kindly to these developments, since the stock has declined 42% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing: We've identified 3 warning signs with Hallador Energy (at least 1 which is significant) , and understanding them would certainly be useful.
While Hallador Energy isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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