Should You Like Corsa Coal Corp.’s (CVE:CSO) High Return On Capital Employed?
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Today we’ll look at Corsa Coal Corp. (CVE:CSO) and reflect on its potential as an investment. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the 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. 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 measures the amount of pre-tax profits a company can generate from the capital employed 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. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.
So, How Do We Calculate ROCE?
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 Corsa Coal:
0.18 = US$66m ÷ (US$287m – US$79m) (Based on the trailing twelve months to September 2018.)
So, Corsa Coal has an ROCE of 18%.
View our latest analysis for Corsa Coal
Does Corsa Coal Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Corsa Coal’s ROCE is meaningfully better than the 2.4% average in the Metals and Mining industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Corsa Coal compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Corsa Coal reported an ROCE of 18% — better than 3 years ago, when the company didn’t make a profit. That implies the business has been improving.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Remember that most companies like Corsa Coal are cyclical businesses. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Corsa Coal.
What Are Current Liabilities, And How Do They Affect Corsa Coal’s 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Corsa Coal has total assets of US$287m and current liabilities of US$79m. Therefore its current liabilities are equivalent to approximately 27% of its total assets. Low current liabilities are not boosting the ROCE too much.
What We Can Learn From Corsa Coal’s ROCE
With that in mind, Corsa Coal’s ROCE appears pretty good. But note: Corsa Coal may not be the best stock to buy. 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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 editorial-team@simplywallst.com.
