Today we are going to look at Mineral Commodities Ltd (ASX:MRC) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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'.
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 Mineral Commodities:
0.31 = US$16m ÷ (US$87m - US$35m) (Based on the trailing twelve months to June 2019.)
So, Mineral Commodities has an ROCE of 31%.
Check out our latest analysis for Mineral Commodities
Does Mineral Commodities Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Mineral Commodities's ROCE is meaningfully higher than the 8.0% average in the Metals and Mining industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, Mineral Commodities's ROCE currently appears to be excellent.
The image below shows how Mineral Commodities's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Given the industry it operates in, Mineral Commodities could be considered cyclical. How cyclical is Mineral Commodities? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How Mineral Commodities's Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Mineral Commodities has total assets of US$87m and current liabilities of US$35m. As a result, its current liabilities are equal to approximately 40% of its total assets. Mineral Commodities's ROCE is boosted somewhat by its middling amount of current liabilities.
What We Can Learn From Mineral Commodities's ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. Mineral Commodities looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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