Yahoo Finance Is Newcrest Mining Limited’s (ASX:NCM) Return On Capital Employed Any Good?
Today we'll look at Newcrest Mining Limited (ASX:NCM) and reflect on its potential as an investment. 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. Last but not least, we'll look at what impact its current liabilities have on 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.
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 Newcrest Mining:
0.082 = US$904m ÷ (US$12b - US$812m) (Based on the trailing twelve months to June 2019.)
So, Newcrest Mining has an ROCE of 8.2%.
Check out our latest analysis for Newcrest Mining
Does Newcrest Mining Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Newcrest Mining's ROCE appears to be around the 8.2% average of the Metals and Mining industry. Setting aside the industry comparison for now, Newcrest Mining's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
Our data shows that Newcrest Mining currently has an ROCE of 8.2%, compared to its ROCE of 5.8% 3 years ago. This makes us think the business might be improving. You can see in the image below how Newcrest Mining's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. We note Newcrest Mining could be considered a cyclical business. 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 Newcrest Mining'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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Newcrest Mining has total assets of US$12b and current liabilities of US$812m. Therefore its current liabilities are equivalent to approximately 6.9% of its total assets. With low levels of current liabilities, at least Newcrest Mining's mediocre ROCE is not unduly boosted.
Our Take On Newcrest Mining's ROCE
If performance improves, then Newcrest Mining may be an OK investment, especially at the right valuation. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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.
