Shareholders Should Look Hard At Sandstorm Gold Ltd.’s (TSE:SSL) 1.1% Return On Capital

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Today we are going to look at Sandstorm Gold Ltd. (TSE:SSL) 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.

First up, we’ll look at what ROCE is and how we calculate it. 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.

Return On Capital Employed (ROCE): What is it?

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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 Sandstorm Gold:

0.011 = US$3.0m ÷ (US$577m – US$4.8m) (Based on the trailing twelve months to September 2018.)

So, Sandstorm Gold has an ROCE of 1.1%.

View our latest analysis for Sandstorm Gold

Does Sandstorm Gold Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Sandstorm Gold’s ROCE appears to be significantly below the 2.4% average in the Metals and Mining industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Sandstorm Gold’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.

Sandstorm Gold has an ROCE of 1.1%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving.

TSX:SSL Last Perf February 5th 19
TSX:SSL Last Perf February 5th 19

When considering this metric, keep in mind that it is backwards looking, and 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, after all, simply a snap shot of a single year. Given the industry it operates in, Sandstorm Gold 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 Sandstorm Gold.

Do Sandstorm Gold’s Current Liabilities Skew Its ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Sandstorm Gold has total liabilities of US$4.8m and total assets of US$577m. As a result, its current liabilities are equal to approximately 0.8% of its total assets. Sandstorm Gold has a low level of current liabilities, which have a negligible impact on its already low ROCE.

The Bottom Line On Sandstorm Gold’s ROCE

Nevertheless, there are potentially more attractive companies to invest in. You might be able to find a better buy than Sandstorm Gold. 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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To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.