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What Can We Make Of Altius Minerals Corporation’s (TSE:ALS) High Return On Capital?

Simply Wall St

Today we’ll evaluate Altius Minerals Corporation (TSE:ALS) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the 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.

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. 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’.

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 Altius Minerals:

0.033 = CA$18m ÷ (CA$559m – CA$30m) (Based on the trailing twelve months to December 2018.)

Therefore, Altius Minerals has an ROCE of 3.3%.

See our latest analysis for Altius Minerals

Is Altius Minerals’s ROCE Good?

One way to assess ROCE is to compare similar companies. In our analysis, Altius Minerals’s ROCE is meaningfully higher than the 2.5% average in the Metals and Mining industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside Altius Minerals’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.

Altius Minerals reported an ROCE of 3.3% — better than 3 years ago, when the company didn’t make a profit. That suggests the business has returned to profitability.

TSX:ALS Past Revenue and Net Income, March 16th 2019

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Given the industry it operates in, Altius Minerals could be considered cyclical. Since the future is so important for investors, you should check out our free report on analyst forecasts for Altius Minerals.

What Are Current Liabilities, And How Do They Affect Altius Minerals’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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Altius Minerals has total liabilities of CA$30m and total assets of CA$559m. As a result, its current liabilities are equal to approximately 5.3% of its total assets. With barely any current liabilities, there is minimal impact on Altius Minerals’s admittedly low ROCE.

Our Take On Altius Minerals’s ROCE

Nevertheless, there are potentially more attractive companies to invest in. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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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 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. Thank you for reading.