Yahoo Finance Is Sandstorm Gold Ltd. (TSE:SSL) Better Than Average At Deploying Capital?
Today we are going to look at Sandstorm Gold Ltd. (TSE:SSL) 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.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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 Sandstorm Gold:
0.026 = US$16m ÷ (US$620m - US$6.4m) (Based on the trailing twelve months to March 2019.)
Therefore, Sandstorm Gold has an ROCE of 2.6%.
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Is Sandstorm Gold's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Sandstorm Gold's ROCE is around the 2.7% average reported by the Metals and Mining industry. Putting aside Sandstorm Gold's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
Sandstorm Gold delivered an ROCE of 2.6%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Remember that most companies like Sandstorm Gold are cyclical businesses. Since the future is so important for investors, you should check out our free report on analyst forecasts for Sandstorm Gold.
Do Sandstorm Gold'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. 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.
Sandstorm Gold has total assets of US$620m and current liabilities of US$6.4m. Therefore its current liabilities are equivalent to approximately 1.0% of its total assets. Sandstorm Gold has a low level of current liabilities, which have a negligible impact on its already low ROCE.
Our Take On Sandstorm Gold's ROCE
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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.
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. Thank you for reading.
