Yahoo Finance Bushveld Minerals Limited (LON:BMN) Earns Among The Best Returns In Its Industry
Today we’ll evaluate Bushveld Minerals Limited (LON:BMN) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on 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. In general, businesses with a higher ROCE are usually better quality. 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 Bushveld Minerals:
0.23 = -UK£2.7m ÷ (UK£145m – UK£18m) (Based on the trailing twelve months to June 2018.)
Therefore, Bushveld Minerals has an ROCE of 23%.
View our latest analysis for Bushveld Minerals
Does Bushveld Minerals Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Bushveld Minerals’s ROCE appears to be substantially greater than the 14% 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, Bushveld Minerals’s ROCE currently appears to be excellent.
Bushveld Minerals reported an ROCE of 23% — better than 3 years ago, when the company didn’t make a profit. That suggests the business has returned to profitability.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Remember that most companies like Bushveld Minerals are cyclical businesses. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Bushveld Minerals’s Current Liabilities Impact Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.
Bushveld Minerals has total liabilities of UK£18m and total assets of UK£145m. Therefore its current liabilities are equivalent to approximately 12% of its total assets. The fairly low level of current liabilities won’t have much impact on the already great ROCE.
What We Can Learn From Bushveld Minerals’s ROCE
Low current liabilities and high ROCE is a good combination, making Bushveld Minerals look quite interesting. But note: Bushveld Minerals may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
