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Gran Colombia Gold Corp. (TSE:GCM) Is Employing Capital Very Effectively

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Today we'll look at Gran Colombia Gold Corp. (TSE:GCM) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

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. 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?

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 Gran Colombia Gold:

0.23 = US$93m ÷ (US$475m - US$65m) (Based on the trailing twelve months to September 2019.)

So, Gran Colombia Gold has an ROCE of 23%.

See our latest analysis for Gran Colombia Gold

Does Gran Colombia Gold Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Gran Colombia Gold's ROCE appears to be substantially greater than the 3.6% 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. Regardless of the industry comparison, in absolute terms, Gran Colombia Gold's ROCE currently appears to be excellent.

Our data shows that Gran Colombia Gold currently has an ROCE of 23%, compared to its ROCE of 7.6% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Gran Colombia Gold's ROCE compares to its industry. Click to see more on past growth.

TSX:GCM Past Revenue and Net Income March 30th 2020
TSX:GCM Past Revenue and Net Income March 30th 2020

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Remember that most companies like Gran Colombia Gold are cyclical businesses. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Gran Colombia Gold.

Gran Colombia Gold's Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

Gran Colombia Gold has total assets of US$475m and current liabilities of US$65m. As a result, its current liabilities are equal to approximately 14% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.

What We Can Learn From Gran Colombia Gold's ROCE

With low current liabilities and a high ROCE, Gran Colombia Gold could be worthy of further investigation. Gran Colombia Gold looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

Gran Colombia Gold is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.

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.