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Today we’ll look at United States Lime & Minerals, Inc. (NASDAQ:USLM) 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. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect 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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 United States Lime & Minerals:
0.085 = US$20m ÷ (US$245m – US$8.0m) (Based on the trailing twelve months to December 2018.)
So, United States Lime & Minerals has an ROCE of 8.5%.
Does United States Lime & Minerals Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that United States Lime & Minerals’s ROCE is fairly close to the Basic Materials industry average of 8.5%. Aside from the industry comparison, United States Lime & Minerals’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if United States Lime & Minerals has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How United States Lime & Minerals’s Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
United States Lime & Minerals has total assets of US$245m and current liabilities of US$8.0m. Therefore its current liabilities are equivalent to approximately 3.3% of its total assets. United States Lime & Minerals reports few current liabilities, which have a negligible impact on its unremarkable ROCE.
Our Take On United States Lime & Minerals’s ROCE
United States Lime & Minerals looks like an ok business, but on this analysis it is not at the top of our buy list. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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 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.