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Is Archon Minerals Limited’s (CVE:ACS) 3.9% ROCE Any Good?

Simply Wall St
·4 mins read

Today we are going to look at Archon Minerals Limited (CVE:ACS) to see whether it might be an attractive investment prospect. 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. And finally, we'll look at how its current liabilities are impacting 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. 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?

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 Archon Minerals:

0.039 = CA$2.1m ÷ (CA$65m - CA$10m) (Based on the trailing twelve months to November 2019.)

So, Archon Minerals has an ROCE of 3.9%.

See our latest analysis for Archon Minerals

Does Archon Minerals Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. It appears that Archon Minerals's ROCE is fairly close to the Metals and Mining industry average of 3.3%. Regardless of how Archon Minerals stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.

Archon Minerals has an ROCE of 3.9%, but it didn't have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving. The image below shows how Archon Minerals's ROCE compares to its industry, and you can click it to see more detail on its past growth.

TSXV:ACS Past Revenue and Net Income, January 30th 2020
TSXV:ACS Past Revenue and Net Income, January 30th 2020

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Given the industry it operates in, Archon Minerals could be considered cyclical. If Archon Minerals is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Do Archon Minerals'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. 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.

Archon Minerals has total assets of CA$65m and current liabilities of CA$10m. As a result, its current liabilities are equal to approximately 16% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.

What We Can Learn From Archon Minerals's ROCE

Archon Minerals has a poor ROCE, and there may be better investment prospects out there. 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 are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.