Yahoo Finance Monarch Gold Corporation’s (TSE:MQR) Investment Returns Are Lagging Its Industry
Today we are going to look at Monarch Gold Corporation (TSE:MQR) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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 Monarch Gold:
0.0055 = CA$397k ÷ (CA$77m - CA$5.0m) (Based on the trailing twelve months to September 2019.)
Therefore, Monarch Gold has an ROCE of 0.5%.
View our latest analysis for Monarch Gold
Is Monarch Gold's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Monarch Gold's ROCE appears to be significantly below the 3.6% average in the Metals and Mining industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Monarch Gold stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
Monarch Gold delivered an ROCE of 0.5%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability. You can click on the image below to see (in greater detail) how Monarch Gold's past growth compares to other companies.
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 only a point-in-time measure. Given the industry it operates in, Monarch Gold could be considered cyclical. How cyclical is Monarch Gold? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Monarch Gold'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. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Monarch Gold has current liabilities of CA$5.0m and total assets of CA$77m. As a result, its current liabilities are equal to approximately 6.5% of its total assets. Monarch Gold has a low level of current liabilities, which have a negligible impact on its already low ROCE.
Our Take On Monarch Gold'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 Monarch Gold. So you may wish to see this free collection of other companies that have grown earnings strongly.
There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are 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.
