Yahoo Finance Is Metalore Resources Limited’s (CVE:MET) 6.3% Return On Capital Employed Good News?
Today we'll evaluate Metalore Resources Limited (CVE:MET) to determine whether it could have potential as an investment idea. 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. 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. Generally speaking a higher ROCE is better. 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.
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 Metalore Resources:
0.063 = CA$518k ÷ (CA$8.3m - CA$92k) (Based on the trailing twelve months to September 2019.)
Therefore, Metalore Resources has an ROCE of 6.3%.
Check out our latest analysis for Metalore Resources
Is Metalore Resources's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see Metalore Resources's ROCE is around the 5.3% average reported by the Oil and Gas industry. Aside from the industry comparison, Metalore Resources's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Metalore Resources has an ROCE of 6.3%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving. You can click on the image below to see (in greater detail) how Metalore Resources'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. 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. We note Metalore Resources could be considered a cyclical business. If Metalore Resources is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Metalore Resources's Current Liabilities Impact 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Metalore Resources has total liabilities of CA$92k and total assets of CA$8.3m. Therefore its current liabilities are equivalent to approximately 1.1% of its total assets. With low levels of current liabilities, at least Metalore Resources's mediocre ROCE is not unduly boosted.
Our Take On Metalore Resources's ROCE
Metalore Resources looks like an ok business, but on this analysis it is not at the top of our buy list. You might be able to find a better investment than Metalore Resources. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
I will like Metalore Resources better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, 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.
