Today we'll look at Wesdome Gold Mines Ltd. (TSE:WDO) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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'.
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 Wesdome Gold Mines:
0.16 = CA$33m ÷ (CA$239m - CA$28m) (Based on the trailing twelve months to June 2019.)
Therefore, Wesdome Gold Mines has an ROCE of 16%.
Does Wesdome Gold Mines Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Wesdome Gold Mines's ROCE appears to be substantially greater than the 3.0% average in the Metals and Mining industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Wesdome Gold Mines compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Wesdome Gold Mines delivered an ROCE of 16%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving. You can see in the image below how Wesdome Gold Mines'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 Wesdome Gold Mines could be considered a cyclical business. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Wesdome Gold Mines.
How Wesdome Gold Mines'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 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.
Wesdome Gold Mines has total assets of CA$239m and current liabilities of CA$28m. As a result, its current liabilities are equal to approximately 12% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
Our Take On Wesdome Gold Mines's ROCE
This is good to see, and with a sound ROCE, Wesdome Gold Mines could be worth a closer look. Wesdome Gold Mines shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.