In This Article:
Today we'll look at Highland Gold Mining Limited (LON:HGM) and reflect on its potential as an investment. 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.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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'.
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 Highland Gold Mining:
0.10 = US$115m ÷ (US$1.3b - US$139m) (Based on the trailing twelve months to June 2019.)
So, Highland Gold Mining has an ROCE of 10%.
See our latest analysis for Highland Gold Mining
Does Highland Gold Mining Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Highland Gold Mining's ROCE is around the 12% average reported by the Metals and Mining industry. Separate from Highland Gold Mining's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, Highland Gold Mining currently has an ROCE of 10% compared to its ROCE 3 years ago, which was 7.5%. This makes us think the business might be improving. The image below shows how Highland Gold Mining's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 Highland Gold Mining 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 Highland Gold Mining.