Evaluating Altius Minerals Corporation’s (TSE:ALS) Investments In Its Business

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Today we are going to look at Altius Minerals Corporation (TSE:ALS) to see whether it might be an attractive investment prospect. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.

Understanding 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. Overall, it is a valuable metric that has its flaws. 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’.

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 Altius Minerals:

0.03 = CA$15m ÷ (CA$534m – CA$25m) (Based on the trailing twelve months to December 2017.)

Therefore, Altius Minerals has an ROCE of 3.0%.

View our latest analysis for Altius Minerals

Is Altius Minerals’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. It appears that Altius Minerals’s ROCE is fairly close to the Metals and Mining industry average of 2.7%. Independently of how Altius Minerals compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.9% available in government bonds. It is likely that there are more attractive prospects out there.

Altius Minerals has an ROCE of 3.0%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving.

TSX:ALS Past Revenue and Net Income, February 20th 2019
TSX:ALS Past Revenue and Net Income, February 20th 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Given the industry it operates in, Altius Minerals 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 Altius Minerals.

Do Altius Minerals’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 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.

Altius Minerals has total assets of CA$534m and current liabilities of CA$25m. As a result, its current liabilities are equal to approximately 4.6% of its total assets. Altius Minerals has very few current liabilities, which have a minimal effect on its already low ROCE.

Our Take On Altius Minerals’s ROCE

Nonetheless, there may be better places to invest your capital. You might be able to find a better buy than Altius Minerals. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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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.