Yahoo Finance Why We Like Hudbay Minerals Inc.’s (TSE:HBM) 7.5% Return On Capital Employed
Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!
Today we’ll evaluate Hudbay Minerals Inc. (TSE:HBM) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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 Hudbay Minerals:
0.075 = US$305m ÷ (US$4.7b – US$315m) (Based on the trailing twelve months to September 2018.)
So, Hudbay Minerals has an ROCE of 7.5%.
View our latest analysis for Hudbay Minerals
Does Hudbay Minerals Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Hudbay Minerals’s ROCE is meaningfully better than the 2.7% average in the Metals and Mining industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Aside from the industry comparison, Hudbay Minerals’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
Our data shows that Hudbay Minerals currently has an ROCE of 7.5%, compared to its ROCE of 0.2% 3 years ago. This makes us think the business might be improving.
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 only a point-in-time measure. Remember that most companies like Hudbay Minerals are cyclical businesses. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Hudbay Minerals.
What Are Current Liabilities, And How Do They Affect Hudbay Minerals’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 counter this, investors can check if a company has high current liabilities relative to total assets.
Hudbay Minerals has total assets of US$4.7b and current liabilities of US$315m. As a result, its current liabilities are equal to approximately 6.7% of its total assets. Hudbay Minerals has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.
The Bottom Line On Hudbay Minerals’s ROCE
If performance improves, then Hudbay Minerals may be an OK investment, especially at the right valuation. 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
