Why Tribune Resources Limited’s (ASX:TBR) Return On Capital Employed Is Impressive

Today we'll evaluate Tribune Resources Limited (ASX:TBR) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

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 Tribune Resources:

0.13 = AU$36m ÷ (AU$303m - AU$30m) (Based on the trailing twelve months to December 2019.)

Therefore, Tribune Resources has an ROCE of 13%.

See our latest analysis for Tribune Resources

Does Tribune Resources Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Tribune Resources's ROCE is meaningfully better than the 9.8% average in the Metals and Mining industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Tribune Resources's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

We can see that, Tribune Resources currently has an ROCE of 13%, less than the 28% it reported 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Tribune Resources's ROCE compares to its industry. Click to see more on past growth.

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, after all, simply a snap shot of a single year. Given the industry it operates in, Tribune Resources could be considered cyclical. You can check if Tribune Resources has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Tribune Resources's Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Tribune Resources has current liabilities of AU$30m and total assets of AU$303m. As a result, its current liabilities are equal to approximately 9.8% of its total assets. In addition to low current liabilities (making a negligible impact on ROCE), Tribune Resources earns a sound return on capital employed.

What We Can Learn From Tribune Resources's ROCE

If Tribune Resources can continue reinvesting in its business, it could be an attractive prospect. Tribune Resources shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

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

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.