Yahoo Finance Why Aurelia Metals Limited’s (ASX:AMI) Return On Capital Employed Is Impressive
Today we are going to look at Aurelia Metals Limited (ASX:AMI) 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.
Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting 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. 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. 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?
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 Aurelia Metals:
0.49 = AU$107m ÷ (AU$267m – AU$47m) (Based on the trailing twelve months to June 2018.)
So, Aurelia Metals has an ROCE of 49%.
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Is Aurelia Metals’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Aurelia Metals’s ROCE is meaningfully better than the 12% average in the Metals and Mining industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Aurelia Metals’s ROCE is currently very good.
Aurelia Metals delivered an ROCE of 49%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability.
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 Aurelia Metals are cyclical businesses. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Aurelia Metals.
Do Aurelia Metals’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Aurelia Metals has total liabilities of AU$47m and total assets of AU$267m. As a result, its current liabilities are equal to approximately 18% of its total assets. The fairly low level of current liabilities won’t have much impact on the already great ROCE.
Our Take On Aurelia Metals’s ROCE
Low current liabilities and high ROCE is a good combination, making Aurelia Metals look quite interesting. But note: Aurelia Metals 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).
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.
