Yahoo Finance Is Alacer Gold Corp.’s (TSE:ASR) 4.6% ROCE Any Good?
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Today we are going to look at Alacer Gold Corp. (TSE:ASR) to see whether it might be an attractive investment prospect. 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.
What is 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. Generally speaking a higher ROCE is better. 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 Alacer Gold:
0.046 = US$57m ÷ (US$1.4b – US$120m) (Based on the trailing twelve months to December 2018.)
Therefore, Alacer Gold has an ROCE of 4.6%.
Check out our latest analysis for Alacer Gold
Does Alacer Gold Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Alacer Gold’s ROCE is meaningfully better than the 2.4% average in the Metals and Mining industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Alacer Gold compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.9% available in government bonds. There are potentially more appealing investments elsewhere.
As we can see, Alacer Gold currently has an ROCE of 4.6%, less than the 9.1% it reported 3 years ago. So investors might consider if it has had issues recently.
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. ROCE is, after all, simply a snap shot of a single year. We note Alacer Gold could be considered a cyclical business. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Alacer Gold.
How Alacer Gold’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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Alacer Gold has total assets of US$1.4b and current liabilities of US$120m. Therefore its current liabilities are equivalent to approximately 8.8% of its total assets. With barely any current liabilities, there is minimal impact on Alacer Gold’s admittedly low ROCE.
Our Take On Alacer Gold’s ROCE
Still, investors could probably find more attractive prospects with better performance out there. But note: Alacer Gold may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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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.
