Yahoo Finance Is Sociedad Química y Minera de Chile S.A.’s (NYSE:SQM) 14% ROCE Any Good?
Today we'll look at Sociedad Química y Minera de Chile S.A. (NYSE:SQM) and reflect on its potential as an investment. 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. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed 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 Sociedad Química y Minera de Chile:
0.14 = US$521m ÷ (US$4.7b - US$982m) (Based on the trailing twelve months to September 2019.)
Therefore, Sociedad Química y Minera de Chile has an ROCE of 14%.
See our latest analysis for Sociedad Química y Minera de Chile
Does Sociedad Química y Minera de Chile Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Sociedad Química y Minera de Chile's ROCE is meaningfully better than the 10% average in the Chemicals industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Sociedad Química y Minera de Chile compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
In our analysis, Sociedad Química y Minera de Chile's ROCE appears to be 14%, compared to 3 years ago, when its ROCE was 11%. This makes us wonder if the company is improving. The image below shows how Sociedad Química y Minera de Chile's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Sociedad Química y Minera de Chile.
Sociedad Química y Minera de Chile's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Sociedad Química y Minera de Chile has total assets of US$4.7b and current liabilities of US$982m. As a result, its current liabilities are equal to approximately 21% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
What We Can Learn From Sociedad Química y Minera de Chile's ROCE
This is good to see, and with a sound ROCE, Sociedad Química y Minera de Chile could be worth a closer look. Sociedad Química y Minera de Chile shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
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.
