Are Dundee Precious Metals Inc.’s (TSE:DPM) High Returns Really That Great?
Today we'll evaluate Dundee Precious Metals Inc. (TSE:DPM) 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. 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'.
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 Dundee Precious Metals:
0.056 = US$46m ÷ (US$909m - US$103m) (Based on the trailing twelve months to June 2019.)
So, Dundee Precious Metals has an ROCE of 5.6%.
View our latest analysis for Dundee Precious Metals
Is Dundee Precious Metals's ROCE Good?
One way to assess ROCE is to compare similar companies. In our analysis, Dundee Precious Metals's ROCE is meaningfully higher than the 2.8% 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 how Dundee Precious Metals stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
In our analysis, Dundee Precious Metals's ROCE appears to be 5.6%, compared to 3 years ago, when its ROCE was 1.4%. This makes us wonder if the company is improving. The image below shows how Dundee Precious Metals's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Remember that most companies like Dundee Precious Metals are cyclical businesses. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Dundee Precious Metals.
What Are Current Liabilities, And How Do They Affect Dundee Precious Metals's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Dundee Precious Metals has total assets of US$909m and current liabilities of US$103m. Therefore its current liabilities are equivalent to approximately 11% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.
Our Take On Dundee Precious Metals's ROCE
With that in mind, we're not overly impressed with Dundee Precious Metals's ROCE, so it may not be the most appealing prospect. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
I will like Dundee Precious Metals 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 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. Thank you for reading.
