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Why You Should Like Wesdome Gold Mines Ltd.’s (TSE:WDO) ROCE

Simply Wall St

Today we'll look at Wesdome Gold Mines Ltd. (TSE:WDO) 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.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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?

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:

0.20 = CA$46m ÷ (CA$265m - CA$31m) (Based on the trailing twelve months to September 2019.)

So, Wesdome Gold Mines has an ROCE of 20%.

Check out our latest analysis for Wesdome Gold Mines

Is Wesdome Gold Mines's ROCE Good?

One way to assess ROCE is to compare similar companies. In our analysis, Wesdome Gold Mines's ROCE is meaningfully higher than the 3.6% 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, Wesdome Gold Mines's ROCE currently appears to be excellent.

We can see that, Wesdome Gold Mines currently has an ROCE of 20% compared to its ROCE 3 years ago, which was 4.9%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Wesdome Gold Mines's past growth compares to other companies.

TSX:WDO Past Revenue and Net Income, February 2nd 2020

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. ROCE is, after all, simply a snap shot of a single year. Given the industry it operates in, Wesdome Gold Mines could be considered cyclical. Since the future is so important for investors, you should check out our free report on analyst forecasts for Wesdome Gold Mines.

Wesdome Gold Mines's Current Liabilities And Their Impact On 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. 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 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$265m and current liabilities of CA$31m. Therefore its current liabilities are equivalent to approximately 12% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.

The Bottom Line On Wesdome Gold Mines's ROCE

With low current liabilities and a high ROCE, Wesdome Gold Mines could be worthy of further investigation. There might be better investments than Wesdome Gold Mines 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.