Is Franco-Nevada Corporation (TSE:FNV) Creating Value For Shareholders?
Today we'll evaluate Franco-Nevada Corporation (TSE:FNV) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting 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. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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 Franco-Nevada:
0.04 = US$206m ÷ (US$5.4b - US$202m) (Based on the trailing twelve months to June 2019.)
So, Franco-Nevada has an ROCE of 4.0%.
View our latest analysis for Franco-Nevada
Does Franco-Nevada Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Franco-Nevada's ROCE is around the 3.5% average reported by the Metals and Mining industry. Regardless of how Franco-Nevada stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
Our data shows that Franco-Nevada currently has an ROCE of 4.0%, compared to its ROCE of 1.9% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Franco-Nevada's ROCE compares to its industry. Click to see more on past growth.
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 only a point-in-time measure. Remember that most companies like Franco-Nevada are cyclical businesses. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Franco-Nevada's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Franco-Nevada has total assets of US$5.4b and current liabilities of US$202m. Therefore its current liabilities are equivalent to approximately 3.8% of its total assets. With barely any current liabilities, there is minimal impact on Franco-Nevada's admittedly low ROCE.
Our Take On Franco-Nevada's ROCE
Nevertheless, there are potentially more attractive companies to invest in. You might be able to find a better investment than Franco-Nevada. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
