Yahoo Finance Why You Should Care About Cobalt 27 Capital Corp.’s (CVE:KBLT) Low Return On Capital
Today we are going to look at Cobalt 27 Capital Corp. (CVE:KBLT) 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, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the ‘return’ (pre-tax profit) a company generates from 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. 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’.
How Do You Calculate Return On Capital Employed?
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 Cobalt 27 Capital:
0.012 = US$35m ÷ (US$608m – US$1.3m) (Based on the trailing twelve months to September 2018.)
So, Cobalt 27 Capital has an ROCE of 1.2%.
View our latest analysis for Cobalt 27 Capital
Is Cobalt 27 Capital’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Cobalt 27 Capital’s ROCE appears to be significantly below the 2.4% average in the Metals and Mining industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Cobalt 27 Capital’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
Cobalt 27 Capital delivered an ROCE of 1.2%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability.
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, after all, simply a snap shot of a single year. Given the industry it operates in, Cobalt 27 Capital could be considered cyclical. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Cobalt 27 Capital.
Cobalt 27 Capital’s Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Cobalt 27 Capital has total liabilities of US$1.3m and total assets of US$608m. As a result, its current liabilities are equal to approximately 0.2% of its total assets. With barely any current liabilities, there is minimal impact on Cobalt 27 Capital’s admittedly low ROCE.
The Bottom Line On Cobalt 27 Capital’s ROCE
Still, investors could probably find more attractive prospects with better performance out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
