Is There More To Zijin Mining Group Company Limited (HKG:2899) Than Its 8.5% Returns On Capital?

Today we are going to look at Zijin Mining Group Company Limited (HKG:2899) to see whether it might be an attractive investment prospect. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its 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. And finally, we’ll look at how its current liabilities are impacting 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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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?

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 Zijin Mining Group:

0.085 = CN¥6.7b ÷ (CN¥117b – CN¥38b) (Based on the trailing twelve months to June 2019.)

So, Zijin Mining Group has an ROCE of 8.5%.

View our latest analysis for Zijin Mining Group

Does Zijin Mining Group Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, Zijin Mining Group’s ROCE appears to be around the 8.3% average of the Metals and Mining industry. Setting aside the industry comparison for now, Zijin Mining Group’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

Our data shows that Zijin Mining Group currently has an ROCE of 8.5%, compared to its ROCE of 4.5% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.

SEHK:2899 Past Revenue and Net Income, September 5th 2019
SEHK:2899 Past Revenue and Net Income, September 5th 2019

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Remember that most companies like Zijin Mining Group are cyclical businesses. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Zijin Mining Group.

How Zijin Mining Group’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 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.

Zijin Mining Group has total assets of CN¥117b and current liabilities of CN¥38b. Therefore its current liabilities are equivalent to approximately 33% of its total assets. Zijin Mining Group’s ROCE is improved somewhat by its moderate amount of current liabilities.

What We Can Learn From Zijin Mining Group’s ROCE

Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. Of course, you might also be able to find a better stock than Zijin Mining Group. So you may wish to see this free collection of other companies that have grown earnings strongly.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.