Today we'll look at Anglo Asian Mining PLC (LON:AAZ) 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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 Anglo Asian Mining:
0.21 = US$27m ÷ (US$156m - US$24m) (Based on the trailing twelve months to December 2018.)
So, Anglo Asian Mining has an ROCE of 21%.
Is Anglo Asian Mining's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Anglo Asian Mining's ROCE is meaningfully higher than the 12% 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. Regardless of the industry comparison, in absolute terms, Anglo Asian Mining's ROCE currently appears to be excellent.
Anglo Asian Mining delivered an ROCE of 21%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability. You can see in the image below how Anglo Asian Mining'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. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Given the industry it operates in, Anglo Asian Mining could be considered cyclical. Since the future is so important for investors, you should check out our free report on analyst forecasts for Anglo Asian Mining.
Do Anglo Asian Mining's Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Anglo Asian Mining has total liabilities of US$24m and total assets of US$156m. As a result, its current liabilities are equal to approximately 15% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
The Bottom Line On Anglo Asian Mining's ROCE
Low current liabilities and high ROCE is a good combination, making Anglo Asian Mining look quite interesting. Anglo Asian Mining 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.
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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.