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Today we'll look at Capstone Mining Corp. (TSE:CS) and reflect on its potential as an investment. 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.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on 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. All else being equal, a better business will have a higher ROCE. 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'.
How Do You Calculate Return On Capital Employed?
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 Capstone Mining:
0.053 = US$67m ÷ (US$1.4b - US$96m) (Based on the trailing twelve months to March 2019.)
So, Capstone Mining has an ROCE of 5.3%.
Check out our latest analysis for Capstone Mining
Does Capstone Mining Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Capstone Mining's ROCE is meaningfully better than the 2.4% 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 how Capstone Mining stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
Capstone Mining has an ROCE of 5.3%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. Given the industry it operates in, Capstone Mining could be considered cyclical. Since the future is so important for investors, you should check out our freereport on analyst forecasts for Capstone Mining.
Capstone Mining'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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Capstone Mining has total liabilities of US$96m and total assets of US$1.4b. As a result, its current liabilities are equal to approximately 7.1% of its total assets. Capstone Mining has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.
Our Take On Capstone Mining's ROCE
If performance improves, then Capstone Mining may be an OK investment, especially at the right valuation. Of course, you might also be able to find a better stock than Capstone Mining. So you may wish to see this freecollection of other companies that have grown earnings strongly.
If you like to buy stocks alongside management, then you might just love this freelist of companies. (Hint: insiders have been buying them).
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.
