Why Mexco Energy Corporation’s (NYSEMKT:MXC) Use Of Investor Capital Doesn’t Look Great

Today we are going to look at Mexco Energy Corporation (NYSEMKT:MXC) 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, we’ll go over how we calculate ROCE. 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 amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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?

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 Mexco Energy:

0.025 = -US$232.2k ÷ (US$9.9m – US$126k) (Based on the trailing twelve months to September 2018.)

So, Mexco Energy has an ROCE of 2.5%.

See our latest analysis for Mexco Energy

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Is Mexco Energy’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Mexco Energy’s ROCE appears to be significantly below the 5.6% average in the Oil and Gas industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Mexco Energy compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. It is likely that there are more attractive prospects out there.

Mexco Energy delivered an ROCE of 2.5%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving.

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When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. We note Mexco Energy could be considered a cyclical business. You can check if Mexco Energy has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How Mexco Energy’s Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.

Mexco Energy has total liabilities of US$126k and total assets of US$9.9m. Therefore its current liabilities are equivalent to approximately 1.3% of its total assets. Mexco Energy has very few current liabilities, which have a minimal effect on its already low ROCE.