Today we’ll evaluate Robex Resources Inc. (CVE:RBX) 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.
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. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.
How Do You Calculate Return On Capital Employed?
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 Robex Resources:
0.31 = CA$17m ÷ (CA$116m – CA$43m) (Based on the trailing twelve months to September 2018.)
Therefore, Robex Resources has an ROCE of 31%.
Does Robex Resources Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, we find that Robex Resources’s ROCE is meaningfully better than the 2.3% 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. Regardless of the industry comparison, in absolute terms, Robex Resources’s ROCE currently appears to be excellent.
Robex Resources delivered an ROCE of 31%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Given the industry it operates in, Robex Resources could be considered cyclical. You can check if Robex Resources has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Robex Resources’s Current Liabilities Impact 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.
Robex Resources has total assets of CA$116m and current liabilities of CA$43m. Therefore its current liabilities are equivalent to approximately 37% of its total assets. A medium level of current liabilities boosts Robex Resources’s ROCE somewhat.
The Bottom Line On Robex Resources’s ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. You might be able to find a better buy than Robex Resources. 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).
I will like Robex Resources better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.