Today we'll look at Kinetic Mines and Energy Limited (HKG:1277) and reflect on its potential as an investment. 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 up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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.
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 Kinetic Mines and Energy:
0.48 = CN¥975m ÷ (CN¥3.0b - CN¥977m) (Based on the trailing twelve months to June 2019.)
Therefore, Kinetic Mines and Energy has an ROCE of 48%.
Is Kinetic Mines and Energy's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Kinetic Mines and Energy's ROCE is meaningfully higher than the 7.6% average in the Oil and Gas 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. Putting aside its position relative to its industry for now, in absolute terms, Kinetic Mines and Energy's ROCE is currently very good.
We can see that, Kinetic Mines and Energy currently has an ROCE of 48% compared to its ROCE 3 years ago, which was 2.4%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Kinetic Mines and Energy's past growth compares to other companies.
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, after all, simply a snap shot of a single year. Given the industry it operates in, Kinetic Mines and Energy could be considered cyclical. How cyclical is Kinetic Mines and Energy? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Kinetic Mines and Energy's ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Kinetic Mines and Energy has total assets of CN¥3.0b and current liabilities of CN¥977m. Therefore its current liabilities are equivalent to approximately 33% of its total assets. Kinetic Mines and Energy's ROCE is boosted somewhat by its middling amount of current liabilities.
What We Can Learn From Kinetic Mines and Energy's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Kinetic Mines and Energy 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.
I will like Kinetic Mines and Energy better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
If you spot an error that warrants correction, please contact the editor at email@example.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.