Yahoo Finance Has Lena Gold-Mining Public Joint Stock Company Lenzoloto (MCX:LNZL) Been Employing Capital Shrewdly?
Today we'll look at Lena Gold-Mining Public Joint Stock Company Lenzoloto (MCX:LNZL) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
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.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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 Lena Gold-Mining Lenzoloto:
0.14 = ₽2.5b ÷ (₽22b - ₽3.4b) (Based on the trailing twelve months to June 2019.)
So, Lena Gold-Mining Lenzoloto has an ROCE of 14%.
See our latest analysis for Lena Gold-Mining Lenzoloto
Does Lena Gold-Mining Lenzoloto Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Lena Gold-Mining Lenzoloto's ROCE is around the 12% average reported by the Metals and Mining industry. Separate from how Lena Gold-Mining Lenzoloto 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.
Lena Gold-Mining Lenzoloto's current ROCE of 14% is lower than its ROCE in the past, which was 29%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Lena Gold-Mining Lenzoloto'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. Remember that most companies like Lena Gold-Mining Lenzoloto are cyclical businesses. You can check if Lena Gold-Mining Lenzoloto has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Lena Gold-Mining Lenzoloto's 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Lena Gold-Mining Lenzoloto has current liabilities of ₽3.4b and total assets of ₽22b. As a result, its current liabilities are equal to approximately 16% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.
The Bottom Line On Lena Gold-Mining Lenzoloto's ROCE
If Lena Gold-Mining Lenzoloto continues to earn an uninspiring ROCE, there may be better places to invest. You might be able to find a better investment than Lena Gold-Mining Lenzoloto. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
