Today we’ll look at Regis Resources Limited (ASX:RRL) 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. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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 Regis Resources:
0.27 = AU$232m ÷ (AU$954m – AU$84m) (Based on the trailing twelve months to June 2019.)
Therefore, Regis Resources has an ROCE of 27%.
Check out our latest analysis for Regis Resources
Does Regis Resources Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Regis Resources’s ROCE is meaningfully better 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, Regis Resources’s ROCE currently appears to be excellent.
You can see in the image below how Regis Resources’s ROCE compares to its industry.
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. We note Regis Resources could be considered a cyclical business. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Regis Resources’s 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Regis Resources has total assets of AU$954m and current liabilities of AU$84m. Therefore its current liabilities are equivalent to approximately 8.8% of its total assets. Regis Resources has low current liabilities, which have a negligible impact on its relatively good ROCE.
Our Take On Regis Resources’s ROCE
This is an attractive combination and suggests the company could have potential. Regis Resources 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.
Regis Resources is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.
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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.