Today we are going to look at Zijin Mining Group Company Limited (HKG:2899) 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.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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 Zijin Mining Group:
0.084 = CN¥6.8b ÷ (CN¥118b - CN¥37b) (Based on the trailing twelve months to September 2019.)
Therefore, Zijin Mining Group has an ROCE of 8.4%.
Does Zijin Mining Group Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see Zijin Mining Group's ROCE is around the 7.7% average reported by the Metals and Mining industry. Separate from how Zijin Mining Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
We can see that, Zijin Mining Group currently has an ROCE of 8.4% compared to its ROCE 3 years ago, which was 5.7%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Zijin Mining Group's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. Remember that most companies like Zijin Mining Group are cyclical businesses. Since the future is so important for investors, you should check out our free report on analyst forecasts for Zijin Mining Group.
What Are Current Liabilities, And How Do They Affect Zijin Mining Group's 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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Zijin Mining Group has total assets of CN¥118b and current liabilities of CN¥37b. As a result, its current liabilities are equal to approximately 31% of its total assets. Zijin Mining Group has a medium level of current liabilities, which would boost its ROCE somewhat.
The Bottom Line On Zijin Mining Group's ROCE
Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. Of course, you might also be able to find a better stock than Zijin Mining Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
There are plenty of other companies that have insiders buying up shares. You probably do 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 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.
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