Today we'll evaluate SSR Mining Inc. (TSE:SSRM) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
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.
Return On Capital Employed (ROCE): What is it?
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. 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 SSR Mining:
0.034 = US$49m ÷ (US$1.7b - US$198m) (Based on the trailing twelve months to June 2019.)
So, SSR Mining has an ROCE of 3.4%.
Does SSR Mining Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, SSR Mining's ROCE appears to be around the 3.5% average of the Metals and Mining industry. Regardless of how SSR Mining stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
SSR Mining reported an ROCE of 3.4% -- better than 3 years ago, when the company didn't make a profit. That implies the business has been improving. You can see in the image below how SSR Mining's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. Given the industry it operates in, SSR Mining 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 SSR Mining.
What Are Current Liabilities, And How Do They Affect SSR Mining's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
SSR Mining has total assets of US$1.7b and current liabilities of US$198m. As a result, its current liabilities are equal to approximately 12% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.
The Bottom Line On SSR Mining's ROCE
SSR Mining has a poor ROCE, and there may be better investment prospects out there. You might be able to find a better investment than SSR Mining. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
I will like SSR Mining better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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 firstname.lastname@example.org. 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.