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Is Maya Gold and Silver Inc. (TSE:MYA) Investing Your Capital Efficiently?

Simply Wall St

Today we'll look at Maya Gold and Silver Inc. (TSE:MYA) 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 of all, we'll work out how to calculate ROCE. 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 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. 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?

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 Maya Gold and Silver:

0.015 = US$642k ÷ (US$49m - US$4.8m) (Based on the trailing twelve months to June 2019.)

So, Maya Gold and Silver has an ROCE of 1.5%.

Check out our latest analysis for Maya Gold and Silver

Is Maya Gold and Silver's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Maya Gold and Silver's ROCE is meaningfully below the Metals and Mining industry average of 3.0%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Maya Gold and Silver 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.

Maya Gold and Silver reported an ROCE of 1.5% -- better than 3 years ago, when the company didn't make a profit. This makes us wonder if the company is improving. You can see in the image below how Maya Gold and Silver's ROCE compares to its industry. Click to see more on past growth.

TSX:MYA Past Revenue and Net Income, August 19th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. Given the industry it operates in, Maya Gold and Silver could be considered cyclical. If Maya Gold and Silver is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Maya Gold and Silver'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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Maya Gold and Silver has total liabilities of US$4.8m and total assets of US$49m. As a result, its current liabilities are equal to approximately 9.7% of its total assets. Maya Gold and Silver has very few current liabilities, which have a minimal effect on its already low ROCE.

Our Take On Maya Gold and Silver's ROCE

Nevertheless, there are potentially more attractive companies to invest in. Of course, you might also be able to find a better stock than Maya Gold and Silver. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like Maya Gold and Silver 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.