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Is Barrick Gold Corporation (TSE:ABX) Better Than Average At Deploying Capital?

Simply Wall St

Today we'll evaluate Barrick Gold Corporation (TSE:ABX) 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. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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'.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Barrick Gold:

0.035 = US$1.5b ÷ (US$44b - US$1.8b) (Based on the trailing twelve months to September 2019.)

So, Barrick Gold has an ROCE of 3.5%.

Check out our latest analysis for Barrick Gold

Does Barrick Gold Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Barrick Gold's ROCE is meaningfully better than the 2.8% 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. Putting aside Barrick Gold's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.

Barrick Gold's current ROCE of 3.5% is lower than its ROCE in the past, which was 6.8%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Barrick Gold's past growth compares to other companies.

TSX:ABX Past Revenue and Net Income, December 16th 2019

It is important to remember that ROCE shows past performance, and is 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. Remember that most companies like Barrick Gold are cyclical businesses. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect Barrick Gold's ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Barrick Gold has total liabilities of US$1.8b and total assets of US$44b. Therefore its current liabilities are equivalent to approximately 4.2% of its total assets. With barely any current liabilities, there is minimal impact on Barrick Gold's admittedly low ROCE.

What We Can Learn From Barrick Gold's ROCE

Nonetheless, there may be better places to invest your capital. You might be able to find a better investment than Barrick Gold. 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).

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.

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. Thank you for reading.