Today we'll evaluate Fiore Gold Ltd. (CVE:F) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the 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.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 Fiore Gold:
0.089 = US$4.5m ÷ (US$56m - US$5.6m) (Based on the trailing twelve months to June 2019.)
So, Fiore Gold has an ROCE of 8.9%.
See our latest analysis for Fiore Gold
Does Fiore Gold Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Fiore Gold's ROCE is meaningfully higher than the 3.4% average in the Metals and Mining industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Aside from the industry comparison, Fiore Gold's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
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, after all, simply a snap shot of a single year. Given the industry it operates in, Fiore Gold could be considered cyclical. Since the future is so important for investors, you should check out our free report on analyst forecasts for Fiore Gold.
Do Fiore Gold's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.
Fiore Gold has total assets of US$56m and current liabilities of US$5.6m. As a result, its current liabilities are equal to approximately 9.9% of its total assets. With low levels of current liabilities, at least Fiore Gold's mediocre ROCE is not unduly boosted.
What We Can Learn From Fiore Gold's ROCE
If performance improves, then Fiore Gold may be an OK investment, especially at the right valuation. Of course, you might also be able to find a better stock than Fiore Gold. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you like to buy stocks alongside management, then you might just love this free list 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.
