Today we'll evaluate Regis Resources Limited (ASX:RRL) 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 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.

Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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'.

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 Regis Resources:

0.26 = AU$250m ÷ (AU$1.0b - AU$97m) (Based on the trailing twelve months to December 2019.)

Therefore, Regis Resources has an ROCE of 26%.

View our latest analysis for Regis Resources

Does Regis Resources Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, we find that Regis Resources's ROCE is meaningfully better than the 9.7% average in the Metals and Mining industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Regis Resources's ROCE currently appears to be excellent.

The image below shows how Regis Resources'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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. We note Regis Resources 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 Regis Resources.

How Regis Resources'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. 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.

Regis Resources has total assets of AU$1.0b and current liabilities of AU$97m. Therefore its current liabilities are equivalent to approximately 9.3% of its total assets. Regis Resources has low current liabilities, which have a negligible impact on its relatively good ROCE.

The Bottom Line On Regis Resources's ROCE

This is an attractive combination and suggests the company could have potential. Regis Resources 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.

Regis Resources is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider 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.