Yahoo Finance A Close Look At Silvercorp Metals Inc.’s (TSE:SVM) 14% ROCE
Today we are going to look at Silvercorp Metals Inc. (TSE:SVM) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 Silvercorp Metals:
0.14 = US$65m ÷ (US$512m - US$34m) (Based on the trailing twelve months to September 2019.)
Therefore, Silvercorp Metals has an ROCE of 14%.
Check out our latest analysis for Silvercorp Metals
Is Silvercorp Metals's ROCE Good?
One way to assess ROCE is to compare similar companies. In our analysis, Silvercorp Metals's ROCE is meaningfully higher than the 3.0% average in the Metals and Mining industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Silvercorp Metals's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Our data shows that Silvercorp Metals currently has an ROCE of 14%, compared to its ROCE of 10% 3 years ago. This makes us think the business might be improving. You can see in the image below how Silvercorp Metals's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. Given the industry it operates in, Silvercorp Metals could be considered cyclical. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Silvercorp Metals's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Silvercorp Metals has total liabilities of US$34m and total assets of US$512m. Therefore its current liabilities are equivalent to approximately 6.6% of its total assets. Low current liabilities have only a minimal impact on Silvercorp Metals's ROCE, making its decent returns more credible.
The Bottom Line On Silvercorp Metals's ROCE
If it is able to keep this up, Silvercorp Metals could be attractive. Silvercorp Metals looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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.
