Is Bushveld Minerals Limited’s (LON:BMN) 41% ROCE Any Good?
Today we are going to look at Bushveld Minerals Limited (LON:BMN) to see whether it might be an attractive investment prospect. 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 of all, we'll work out how to 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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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.
How Do You Calculate Return On Capital Employed?
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 Bushveld Minerals:
0.41 = US$90m ÷ (US$245m - US$25m) (Based on the trailing twelve months to June 2019.)
Therefore, Bushveld Minerals has an ROCE of 41%.
Check out our latest analysis for Bushveld Minerals
Is Bushveld Minerals's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Bushveld Minerals's ROCE appears to be substantially greater than the 13% average in the Metals and Mining industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Bushveld Minerals's ROCE is currently very good.
Bushveld Minerals delivered an ROCE of 41%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. You can see in the image below how Bushveld Minerals's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. We note Bushveld Minerals could be considered a cyclical business. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Bushveld Minerals.
How Bushveld Minerals's Current Liabilities Impact 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Bushveld Minerals has current liabilities of US$25m and total assets of US$245m. Therefore its current liabilities are equivalent to approximately 10% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
Our Take On Bushveld Minerals's ROCE
This is good to see, and with such a high ROCE, Bushveld Minerals may be worth a closer look. Bushveld Minerals looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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.
