Today we’ll evaluate Wesdome Gold Mines Ltd. (TSE:WDO) 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.
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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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.’
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 Wesdome Gold Mines:
0.14 = CA$13m ÷ (CA$203m – CA$27m) (Based on the trailing twelve months to September 2018.)
So, Wesdome Gold Mines has an ROCE of 14%.
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Is Wesdome Gold Mines’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Wesdome Gold Mines’s ROCE appears to be substantially greater than the 2.4% 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. Independently of how Wesdome Gold Mines compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
In our analysis, Wesdome Gold Mines’s ROCE appears to be 14%, compared to 3 years ago, when its ROCE was 1.5%. 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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Given the industry it operates in, Wesdome Gold Mines could be considered cyclical. Since the future is so important for investors, you should check out our free report on analyst forecasts for Wesdome Gold Mines.
How Wesdome Gold Mines’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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Wesdome Gold Mines has total liabilities of CA$27m and total assets of CA$203m. As a result, its current liabilities are equal to approximately 13% of its total assets. Low current liabilities are not boosting the ROCE too much.
The Bottom Line On Wesdome Gold Mines’s ROCE
Overall, Wesdome Gold Mines has a decent ROCE and could be worthy of further research. Of course you might be able to find a better stock than Wesdome Gold Mines. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Wesdome Gold Mines better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.