Why You Should Like Atico Mining Corporation’s (CVE:ATY) ROCE

Today we'll look at Atico Mining Corporation (CVE:ATY) 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.

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

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

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

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 Atico Mining:

0.098 = US$6.6m ÷ (US$79m - US$11m) (Based on the trailing twelve months to June 2019.)

So, Atico Mining has an ROCE of 9.8%.

View our latest analysis for Atico Mining

Does Atico Mining Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Atico Mining's ROCE appears to be substantially greater than the 3.4% average in the Metals and Mining industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Aside from the industry comparison, Atico Mining's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

Our data shows that Atico Mining currently has an ROCE of 9.8%, compared to its ROCE of 3.8% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Atico Mining's ROCE compares to its industry. Click to see more on past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Given the industry it operates in, Atico Mining could be considered cyclical. If Atico Mining is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Do Atico Mining's Current Liabilities Skew 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.

Atico Mining has total liabilities of US$11m and total assets of US$79m. As a result, its current liabilities are equal to approximately 14% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

The Bottom Line On Atico Mining's ROCE

If Atico Mining continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like Atico Mining better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.