What Can We Make Of K92 Mining Inc.’s (CVE:KNT) High Return On Capital?

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Today we’ll evaluate K92 Mining Inc. (CVE:KNT) 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. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting 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. 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 K92 Mining:

0.20 = -US$4.1m ÷ (US$55m – US$16m) (Based on the trailing twelve months to September 2018.)

Therefore, K92 Mining has an ROCE of 20%.

Check out our latest analysis for K92 Mining

Is K92 Mining’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that K92 Mining’s ROCE is meaningfully better than the 2.4% 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. Separate from K92 Mining’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

K92 Mining reported an ROCE of 20% — better than 3 years ago, when the company didn’t make a profit. This makes us wonder if the company is improving.

TSXV:KNT Last Perf February 7th 19
TSXV:KNT Last Perf February 7th 19

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. Given the industry it operates in, K92 Mining could be considered cyclical. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How K92 Mining’s Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

K92 Mining has total assets of US$55m and current liabilities of US$16m. Therefore its current liabilities are equivalent to approximately 29% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

What We Can Learn From K92 Mining’s ROCE

Overall, K92 Mining has a decent ROCE and could be worthy of further research. Of course you might be able to find a better stock than K92 Mining. 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.

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.