Today we'll look at Dynacor Gold Mines Inc. (TSE:DNG) and reflect on its potential as an investment. 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. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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 Dynacor Gold Mines:
0.14 = US$9.1m ÷ (US$71m - US$6.5m) (Based on the trailing twelve months to September 2019.)
Therefore, Dynacor Gold Mines has an ROCE of 14%.
Does Dynacor Gold Mines Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Dynacor Gold Mines's ROCE is meaningfully higher than the 3.0% average in the Metals and Mining industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Dynacor Gold Mines's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
The image below shows how Dynacor Gold Mines'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. 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. We note Dynacor Gold Mines could be considered a cyclical business. You can check if Dynacor Gold Mines has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Dynacor Gold Mines's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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.
Dynacor Gold Mines has total liabilities of US$6.5m and total assets of US$71m. Therefore its current liabilities are equivalent to approximately 9.2% of its total assets. With low current liabilities, Dynacor Gold Mines's decent ROCE looks that much more respectable.
The Bottom Line On Dynacor Gold Mines's ROCE
This is good to see, and while better prospects may exist, Dynacor Gold Mines seems worth researching further. Dynacor Gold Mines 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 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.
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.