Yahoo Finance Here’s why Acacia Mining plc’s (LON:ACA) Returns On Capital Matters So Much
Today we’ll evaluate Acacia Mining plc (LON:ACA) 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.
First, 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 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. 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?
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 Acacia Mining:
0.071 = US$101m ÷ (US$1.8b – US$403m) (Based on the trailing twelve months to December 2018.)
So, Acacia Mining has an ROCE of 7.2%.
See our latest analysis for Acacia Mining
Is Acacia Mining’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Acacia Mining’s ROCE appears to be significantly below the 13% average in the Metals and Mining industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Acacia Mining 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.
As we can see, Acacia Mining currently has an ROCE of 7.2% compared to its ROCE 3 years ago, which was 0.04%. This makes us think the business might be improving.
When considering this metric, keep in mind that it is backwards looking, and 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. We note Acacia 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 Acacia Mining.
How Acacia Mining’s Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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.
Acacia Mining has total assets of US$1.8b and current liabilities of US$403m. Therefore its current liabilities are equivalent to approximately 22% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.
Our Take On Acacia Mining’s ROCE
With that in mind, we’re not overly impressed with Acacia Mining’s ROCE, so it may not be the most appealing prospect. You might be able to find a better buy than Acacia Mining. 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).
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.
