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Capstone Mining Corp.’s (TSE:CS) Investment Returns Are Lagging Its Industry

Simply Wall St

Today we are going to look at Capstone Mining Corp. (TSE:CS) to see whether it might be an attractive investment prospect. 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. 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. Generally speaking a higher ROCE is better. 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 Capstone Mining:

0.011 = US$14m ÷ (US$1.3b - US$55m) (Based on the trailing twelve months to December 2019.)

Therefore, Capstone Mining has an ROCE of 1.1%.

View our latest analysis for Capstone Mining

Does Capstone Mining Have A Good ROCE?

One way to assess ROCE is to compare similar companies. We can see Capstone Mining's ROCE is meaningfully below the Metals and Mining industry average of 3.5%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Capstone Mining's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.

Capstone Mining delivered an ROCE of 1.1%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability. The image below shows how Capstone Mining's ROCE compares to its industry, and you can click it to see more detail on its past growth.

TSX:CS Past Revenue and Net Income, February 13th 2020

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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, after all, simply a snap shot of a single year. Given the industry it operates in, Capstone Mining could be considered cyclical. Since the future is so important for investors, you should check out our free report on analyst forecasts for Capstone Mining.

Do Capstone Mining's Current Liabilities Skew Its ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Capstone Mining has total assets of US$1.3b and current liabilities of US$55m. As a result, its current liabilities are equal to approximately 4.2% of its total assets. Capstone Mining has very few current liabilities, which have a minimal effect on its already low ROCE.

The Bottom Line On Capstone Mining's ROCE

Nonetheless, there may be better places to invest your capital. Of course, you might also be able to find a better stock than Capstone Mining. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.