Today we are going to look at SSR Mining Inc. (TSE:SSRM) 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, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect 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. 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?
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 SSR Mining:
0.034 = US$49m ÷ (US$1.7b – US$198m) (Based on the trailing twelve months to June 2019.)
Therefore, SSR Mining has an ROCE of 3.4%.
Does SSR Mining Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, SSR Mining’s ROCE appears to be around the 3.4% average of the Metals and Mining industry. Regardless of how SSR Mining stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
SSR Mining has an ROCE of 3.4%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving. The image below shows how SSR Mining’s ROCE compares to its industry, and you can click it to see more detail on its past growth.
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, after all, simply a snap shot of a single year. We note SSR Mining 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.
How SSR Mining’s Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
SSR Mining has total assets of US$1.7b and current liabilities of US$198m. As a result, its current liabilities are equal to approximately 12% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
The Bottom Line On SSR Mining’s ROCE
While that is good to see, SSR Mining has a low ROCE and does not look attractive in this analysis. You might be able to find a better investment than SSR Mining. 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).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 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.