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Today we’ll evaluate Sylvania Platinum Limited (LON:SLP) to determine whether it could have potential as an investment idea. 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. Second, we’ll look at its ROCE compared to similar companies. Last but not least, we’ll look at what impact its current liabilities have on 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. 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.’
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 Sylvania Platinum:
0.13 = US$17m ÷ (US$138m – US$5.8m) (Based on the trailing twelve months to December 2018.)
So, Sylvania Platinum has an ROCE of 13%.
Does Sylvania Platinum Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, Sylvania Platinum’s ROCE appears to be around the 13% average of the Metals and Mining industry. Regardless of where Sylvania Platinum sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Sylvania Platinum delivered an ROCE of 13%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability.
When considering this metric, keep in mind that it is backwards looking, and 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, Sylvania Platinum could be considered cyclical. Since the future is so important for investors, you should check out our free report on analyst forecasts for Sylvania Platinum.
What Are Current Liabilities, And How Do They Affect Sylvania Platinum’s 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 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.
Sylvania Platinum has total assets of US$138m and current liabilities of US$5.8m. Therefore its current liabilities are equivalent to approximately 4.2% of its total assets. Low current liabilities have only a minimal impact on Sylvania Platinum’s ROCE, making its decent returns more credible.
What We Can Learn From Sylvania Platinum’s ROCE
If it is able to keep this up, Sylvania Platinum could be attractive. Sylvania Platinum looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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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.