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A Close Look At DRDGOLD Limited’s (NYSE:DRD) 14% ROCE

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·4 min read
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Today we'll look at DRDGOLD Limited (NYSE:DRD) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its 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. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding 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. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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?

The formula for calculating the return on capital employed is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for DRDGOLD:

0.14 = SAR541m ÷ (SAR4.4b - SAR463m) (Based on the trailing twelve months to December 2019.)

So, DRDGOLD has an ROCE of 14%.

See our latest analysis for DRDGOLD

Does DRDGOLD Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that DRDGOLD's ROCE is meaningfully better than the 11% 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. Separate from DRDGOLD's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Our data shows that DRDGOLD currently has an ROCE of 14%, compared to its ROCE of 1.6% 3 years ago. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how DRDGOLD's past growth compares to other companies.

NYSE:DRD Past Revenue and Net Income April 14th 2020
NYSE:DRD Past Revenue and Net Income April 14th 2020

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Remember that most companies like DRDGOLD are cyclical businesses. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for DRDGOLD.

How DRDGOLD's Current Liabilities Impact 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 counter this, investors can check if a company has high current liabilities relative to total assets.

DRDGOLD has current liabilities of SAR463m and total assets of SAR4.4b. Therefore its current liabilities are equivalent to approximately 11% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

Our Take On DRDGOLD's ROCE

Overall, DRDGOLD has a decent ROCE and could be worthy of further research. DRDGOLD 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.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.