Has Gulfport Energy Corporation (NASDAQ:GPOR) Been Employing Capital Shrewdly?


Today we’ll look at Gulfport Energy Corporation (NASDAQ:GPOR) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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?

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 Gulfport Energy:

0.083 = US$481m ÷ (US$6.3b – US$474m) (Based on the trailing twelve months to September 2019.)

So, Gulfport Energy has an ROCE of 8.3%.

See our latest analysis for Gulfport Energy

Is Gulfport Energy’s ROCE Good?

One way to assess ROCE is to compare similar companies. It appears that Gulfport Energy’s ROCE is fairly close to the Oil and Gas industry average of 8.9%. Setting aside the industry comparison for now, 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.

Gulfport Energy has an ROCE of 8.3%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving. You can see in the image below how Gulfport Energy’s ROCE compares to its industry. Click to see more on past growth.

NasdaqGS:GPOR Past Revenue and Net Income, December 3rd 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. Given the industry it operates in, Gulfport Energy could be considered cyclical. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How Gulfport Energy’s Current Liabilities Impact 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Gulfport Energy has total assets of US$6.3b and current liabilities of US$474m. Therefore its current liabilities are equivalent to approximately 7.6% of its total assets. Gulfport Energy has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.

Our Take On Gulfport Energy’s ROCE

Gulfport Energy looks like an ok business, but on this analysis it is not at the top of our buy list. Of course, you might also be able to find a better stock than Gulfport Energy. So you may wish to see this free collection of other companies that have grown earnings strongly.

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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