Today we are going to look at Clean Energy Fuels Corp. (NASDAQ:CLNE) 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.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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.
How Do You Calculate Return On Capital Employed?
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 Clean Energy Fuels:
0.014 = US$8.9m ÷ (US$777m - US$163m) (Based on the trailing twelve months to December 2019.)
Therefore, Clean Energy Fuels has an ROCE of 1.4%.
View our latest analysis for Clean Energy Fuels
Does Clean Energy Fuels Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see Clean Energy Fuels's ROCE is meaningfully below the Oil and Gas industry average of 6.8%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Clean Energy Fuels's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
Clean Energy Fuels reported an ROCE of 1.4% -- better than 3 years ago, when the company didn't make a profit. That suggests the business has returned to profitability. The image below shows how Clean Energy Fuels'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. ROCE is, after all, simply a snap shot of a single year. We note Clean Energy Fuels could be considered a cyclical business. Since the future is so important for investors, you should check out our free report on analyst forecasts for Clean Energy Fuels.
Clean Energy Fuels's Current Liabilities And Their Impact On Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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.
Clean Energy Fuels has current liabilities of US$163m and total assets of US$777m. As a result, its current liabilities are equal to approximately 21% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.
The Bottom Line On Clean Energy Fuels's ROCE
While that is good to see, Clean Energy Fuels has a low ROCE and does not look attractive in this analysis. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
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How Do Clean Energy Fuels Corp.’s (NASDAQ:CLNE) Returns On Capital Compare To Peers? - Yahoo Finance
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