Yahoo Finance Why Majestic Gold Corp.’s (CVE:MJS) Return On Capital Employed Is Impressive
Today we are going to look at Majestic Gold Corp. (CVE:MJS) 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.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 Majestic Gold:
0.097 = US$9.4m ÷ (US$120m - US$24m) (Based on the trailing twelve months to September 2019.)
So, Majestic Gold has an ROCE of 9.7%.
View our latest analysis for Majestic Gold
Is Majestic Gold's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, we find that Majestic Gold's ROCE is meaningfully better than the 3.3% average in the Metals and Mining industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Majestic Gold's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Majestic Gold has an ROCE of 9.7%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That suggests the business has returned to profitability. You can see in the image below how Majestic Gold's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. Remember that most companies like Majestic Gold are cyclical businesses. How cyclical is Majestic Gold? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How Majestic Gold's Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Majestic Gold has current liabilities of US$24m and total assets of US$120m. As a result, its current liabilities are equal to approximately 20% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
What We Can Learn From Majestic Gold's ROCE
Overall, Majestic Gold has a decent ROCE and could be worthy of further research. Majestic Gold shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
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