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Today we are going to look at Sylvania Platinum Limited (LON:SLP) to see whether it might be an attractive investment prospect. 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.
Firstly, 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.
Understanding 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. 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.
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 Sylvania Platinum:
0.16 = US$23m ÷ (US$153m - US$6.9m) (Based on the trailing twelve months to June 2019.)
So, Sylvania Platinum has an ROCE of 16%.
Does Sylvania Platinum Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Sylvania Platinum's ROCE is meaningfully better than the 12% 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. Regardless of where Sylvania Platinum sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
In our analysis, Sylvania Platinum's ROCE appears to be 16%, compared to 3 years ago, when its ROCE was 5.1%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Sylvania Platinum's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is 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. ROCE is only a point-in-time measure. We note Sylvania Platinum could be considered a cyclical business. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Sylvania Platinum's Current Liabilities Skew 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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Sylvania Platinum has total liabilities of US$6.9m and total assets of US$153m. As a result, its current liabilities are equal to approximately 4.5% of its total assets. Low current liabilities have only a minimal impact on Sylvania Platinum's ROCE, making its decent returns more credible.
Our Take On Sylvania Platinum's ROCE
This is good to see, and while better prospects may exist, Sylvania Platinum seems worth researching further. There might be better investments than Sylvania Platinum 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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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. Thank you for reading.