Yahoo Finance Trans-Siberian Gold plc (LON:TSG) Is Employing Capital Very Effectively
Today we'll evaluate Trans-Siberian Gold plc (LON:TSG) 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. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting 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. 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 Trans-Siberian Gold:
0.19 = US$20m ÷ (US$129m - US$25m) (Based on the trailing twelve months to June 2019.)
Therefore, Trans-Siberian Gold has an ROCE of 19%.
Check out our latest analysis for Trans-Siberian Gold
Does Trans-Siberian Gold Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Trans-Siberian Gold's ROCE is meaningfully better than the 13% average in the Metals and Mining industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Trans-Siberian Gold's ROCE is currently very good.
We can see that, Trans-Siberian Gold currently has an ROCE of 19% compared to its ROCE 3 years ago, which was 10%. This makes us wonder if the company is improving. The image below shows how Trans-Siberian Gold's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. We note Trans-Siberian Gold could be considered a cyclical business. If Trans-Siberian Gold is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Trans-Siberian Gold's Current Liabilities And Their Impact On 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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Trans-Siberian Gold has total assets of US$129m and current liabilities of US$25m. As a result, its current liabilities are equal to approximately 20% 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 Trans-Siberian Gold's ROCE
With low current liabilities and a high ROCE, Trans-Siberian Gold could be worthy of further investigation. Trans-Siberian Gold 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.
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.
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. Thank you for reading.
