U.S. Markets closed

Silvercorp Metals Inc. (TSE:SVM) Earns A Nice Return On Capital Employed

Simply Wall St

Today we'll look at Silvercorp Metals Inc. (TSE:SVM) 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from 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?

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 Silvercorp Metals:

0.14 = US$61m ÷ (US$481m - US$44m) (Based on the trailing twelve months to December 2018.)

So, Silvercorp Metals has an ROCE of 14%.

Check out our latest analysis for Silvercorp Metals

Does Silvercorp Metals Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, we find that Silvercorp Metals's ROCE is meaningfully better than the 2.2% average in the Metals and Mining 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. Separate from Silvercorp Metals's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Silvercorp Metals delivered an ROCE of 14%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving.

TSX:SVM Past Revenue and Net Income, April 19th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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 Silvercorp Metals are cyclical businesses. Since the future is so important for investors, you should check out our free report on analyst forecasts for Silvercorp Metals.

How Silvercorp Metals's Current Liabilities Impact 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Silvercorp Metals has total liabilities of US$44m and total assets of US$481m. Therefore its current liabilities are equivalent to approximately 9.1% of its total assets. With low current liabilities, Silvercorp Metals's decent ROCE looks that much more respectable.

What We Can Learn From Silvercorp Metals's ROCE

If it is able to keep this up, Silvercorp Metals could be attractive. There might be better investments than Silvercorp Metals out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

I will like Silvercorp Metals 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.