How Do Maya Gold and Silver Inc.’s (TSE:MYA) Returns Compare To Its Industry?

Today we’ll look at Maya Gold and Silver Inc. (TSE:MYA) 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.

Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE 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 ‘return’ (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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’.

So, How Do We Calculate ROCE?

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 Maya Gold and Silver:

0.015 = US$642k ÷ (US$49m – US$4.8m) (Based on the trailing twelve months to June 2019.)

So, Maya Gold and Silver has an ROCE of 1.5%.

View our latest analysis for Maya Gold and Silver

Does Maya Gold and Silver Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, Maya Gold and Silver’s ROCE appears to be significantly below the 3.4% average in the Metals and Mining industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Maya Gold and Silver’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.

Maya Gold and Silver has an ROCE of 1.5%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. That suggests the business has returned to profitability.

TSX:MYA Past Revenue and Net Income, August 26th 2019
TSX:MYA Past Revenue and Net Income, August 26th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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, after all, simply a snap shot of a single year. Remember that most companies like Maya Gold and Silver are cyclical businesses. How cyclical is Maya Gold and Silver? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Maya Gold and Silver’s ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Maya Gold and Silver has total liabilities of US$4.8m and total assets of US$49m. As a result, its current liabilities are equal to approximately 9.7% of its total assets. Maya Gold and Silver has a low level of current liabilities, which have a negligible impact on its already low ROCE.

Our Take On Maya Gold and Silver’s ROCE

Still, investors could probably find more attractive prospects with better performance out there. 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 are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.

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. Thank you for reading.