Today we’ll evaluate Hudbay Minerals Inc. (TSE:HBM) to determine whether it could have potential as an investment idea. 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. Finally, we’ll look at how its current liabilities affect 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. 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 Hudbay Minerals:
0.067 = US$294m ÷ (US$4.7b – US$327m) (Based on the trailing twelve months to December 2018.)
So, Hudbay Minerals has an ROCE of 6.7%.
Does Hudbay Minerals Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Hudbay Minerals’s ROCE is meaningfully better than the 2.3% 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 Hudbay Minerals stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
Hudbay Minerals has an ROCE of 6.7%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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 Hudbay Minerals 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 Hudbay Minerals’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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Hudbay Minerals has total liabilities of US$327m and total assets of US$4.7b. As a result, its current liabilities are equal to approximately 7.0% of its total assets. With low levels of current liabilities, at least Hudbay Minerals’s mediocre ROCE is not unduly boosted.
Our Take On Hudbay Minerals’s ROCE
If performance improves, then Hudbay Minerals may be an OK investment, especially at the right valuation. Of course you might be able to find a better stock than Hudbay Minerals. So you may wish to see this free collection of other companies that have grown earnings strongly.
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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If you spot an error that warrants correction, please contact the editor at email@example.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.