Shareholders Should Look Hard At Atalaya Mining Plc’s (LON:ATYM) 10%Return On Capital

Today we are going to look at Atalaya Mining Plc (LON:ATYM) 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. 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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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. 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?

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 Atalaya Mining:

0.10 = €38m ÷ (€439m – €58m) (Based on the trailing twelve months to September 2019.)

So, Atalaya Mining has an ROCE of 10%.

See our latest analysis for Atalaya Mining

Does Atalaya Mining Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Atalaya Mining’s ROCE appears meaningfully below the 13% average reported by 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. Regardless of where Atalaya Mining sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Atalaya Mining has an ROCE of 10%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. That suggests the business has returned to profitability. You can see in the image below how Atalaya Mining’s ROCE compares to its industry. Click to see more on past growth.

AIM:ATYM Past Revenue and Net Income, February 28th 2020
AIM:ATYM Past Revenue and Net Income, February 28th 2020

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 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, Atalaya Mining could be considered cyclical. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Atalaya Mining.

Do Atalaya Mining’s Current Liabilities Skew Its ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Atalaya Mining has current liabilities of €58m and total assets of €439m. Therefore its current liabilities are equivalent to approximately 13% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

The Bottom Line On Atalaya Mining’s ROCE

Overall, Atalaya Mining has a decent ROCE and could be worthy of further research. Atalaya Mining 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.

I will like Atalaya Mining better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.

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