St Barbara Limited (ASX:SBM) Earns A Nice Return On Capital Employed
Today we'll evaluate St Barbara Limited (ASX:SBM) 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 of all, we'll work out how to calculate ROCE. 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. Ultimately, it is a useful but imperfect metric. 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 St Barbara:
0.15 = AU$202m ÷ (AU$1.4b - AU$96m) (Based on the trailing twelve months to June 2019.)
So, St Barbara has an ROCE of 15%.
See our latest analysis for St Barbara
Does St Barbara Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, St Barbara's ROCE is meaningfully higher than the 8.0% average in the Metals and Mining industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how St Barbara compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
St Barbara's current ROCE of 15% is lower than its ROCE in the past, which was 36%, 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how St Barbara's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. We note St Barbara could be considered a cyclical business. Since the future is so important for investors, you should check out our free report on analyst forecasts for St Barbara.
What Are Current Liabilities, And How Do They Affect St Barbara's 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
St Barbara has total liabilities of AU$96m and total assets of AU$1.4b. Therefore its current liabilities are equivalent to approximately 6.8% of its total assets. In addition to low current liabilities (making a negligible impact on ROCE), St Barbara earns a sound return on capital employed.
What We Can Learn From St Barbara's ROCE
If it is able to keep this up, St Barbara could be attractive. There might be better investments than St Barbara 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.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
