Yahoo Finance Is Altius Minerals Corporation's (TSE:ALS) Capital Allocation Ability Worth Your Time?
Today we'll look at Altius Minerals Corporation (TSE:ALS) and reflect on its potential as an investment. 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.
First up, we'll look at what ROCE is and how we calculate it. 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 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. Overall, it is a valuable metric that has its flaws. 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 Altius Minerals:
0.036 = CA$19m ÷ (CA$567m - CA$27m) (Based on the trailing twelve months to December 2019.)
Therefore, Altius Minerals has an ROCE of 3.6%.
See our latest analysis for Altius Minerals
Does Altius Minerals Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. It appears that Altius Minerals's ROCE is fairly close to the Metals and Mining industry average of 3.5%. Independently of how Altius Minerals compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.4% available in government bonds. Readers may wish to look for more rewarding investments.
Altius Minerals reported an ROCE of 3.6% -- better than 3 years ago, when the company didn't make a profit. That suggests the business has returned to profitability. You can see in the image below how Altius Minerals's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Given the industry it operates in, Altius Minerals could be considered cyclical. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Altius Minerals.
How Altius Minerals's Current Liabilities Impact 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.
Altius Minerals has total assets of CA$567m and current liabilities of CA$27m. As a result, its current liabilities are equal to approximately 4.7% of its total assets. Altius Minerals has a low level of current liabilities, which have a negligible impact on its already low ROCE.
What We Can Learn From Altius Minerals's ROCE
Nevertheless, there are potentially more attractive companies to invest in. Of course, you might also be able to find a better stock than Altius Minerals. So you may wish to see this free collection of other companies that have grown earnings strongly.
Altius Minerals is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider 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.
