Yahoo Finance Why Medusa Mining Limited’s (ASX:MML) Return On Capital Employed Is Impressive
Today we'll evaluate Medusa Mining Limited (ASX:MML) 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
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. Ultimately, it is a useful but imperfect metric. 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?
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 Medusa Mining:
0.29 = US$45m ÷ (US$174m - US$19m) (Based on the trailing twelve months to December 2019.)
So, Medusa Mining has an ROCE of 29%.
See our latest analysis for Medusa Mining
Is Medusa Mining's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Medusa Mining's ROCE is meaningfully higher than the 9.4% 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. Setting aside the comparison to its industry for a moment, Medusa Mining's ROCE in absolute terms currently looks quite high.
Medusa Mining delivered an ROCE of 29%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability. You can click on the image below to see (in greater detail) how Medusa Mining's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. Remember that most companies like Medusa Mining are cyclical businesses. If Medusa Mining is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Medusa Mining'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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Medusa Mining has total assets of US$174m and current liabilities of US$19m. Therefore its current liabilities are equivalent to approximately 11% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.
Our Take On Medusa Mining's ROCE
, There might be better investments than Medusa Mining out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
