Yahoo Finance Here’s why Hochschild Mining plc’s (LON:HOC) Returns On Capital Matters So Much
Today we'll evaluate Hochschild Mining plc (LON:HOC) to determine whether it could have potential as an investment idea. 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.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. 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 Hochschild Mining:
0.071 = US$74m ÷ (US$1.3b - US$239m) (Based on the trailing twelve months to December 2018.)
So, Hochschild Mining has an ROCE of 7.1%.
See our latest analysis for Hochschild Mining
Is Hochschild Mining's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Hochschild Mining's ROCE appears meaningfully below the 13% average reported by the Metals and Mining industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Hochschild 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.
Hochschild Mining has an ROCE of 7.1%, but it didn't have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving. The image below shows how Hochschild Mining'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. Remember that most companies like Hochschild Mining are cyclical businesses. Since the future is so important for investors, you should check out our free report on analyst forecasts for Hochschild Mining.
Hochschild Mining'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. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Hochschild Mining has total assets of US$1.3b and current liabilities of US$239m. As a result, its current liabilities are equal to approximately 19% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
What We Can Learn From Hochschild Mining's ROCE
If Hochschild Mining continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might also be able to find a better stock than Hochschild Mining. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Hochschild Mining better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.
