Yahoo Finance Does Anglo Asian Mining PLC’s (LON:AAZ) ROCE Reflect Well On The Business?
Today we are going to look at Anglo Asian Mining PLC (LON:AAZ) 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.
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.
Understanding Return On Capital Employed (ROCE)
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. 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?
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 Anglo Asian Mining:
0.13 = US$8.8m ÷ (US$161m – US$34m) (Based on the trailing twelve months to June 2018.)
Therefore, Anglo Asian Mining has an ROCE of 13%.
See our latest analysis for Anglo Asian Mining
Does Anglo Asian Mining Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Anglo Asian Mining’s ROCE appears to be around the 14% average of the Metals and Mining industry. Separate from Anglo Asian Mining’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Anglo Asian Mining reported an ROCE of 13% — better than 3 years ago, when the company didn’t make a profit. This makes us wonder if the company is improving.
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. ROCE is, after all, simply a snap shot of a single year. We note Anglo Asian Mining could be considered a cyclical business. 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 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.
Anglo Asian Mining has total liabilities of US$34m and total assets of US$161m. As a result, its current liabilities are equal to approximately 21% of its total assets. Low current liabilities are not boosting the ROCE too much.
The Bottom Line On Anglo Asian Mining’s ROCE
With that in mind, Anglo Asian Mining’s ROCE appears pretty good. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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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.
