Today we are going to look at Laneway Resources Limited (ASX:LNY) 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.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. 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 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. 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 Laneway Resources:

0.17 = AU$2.3m ÷ (AU$16m - AU$1.9m) (Based on the trailing twelve months to June 2019.)

Therefore, Laneway Resources has an ROCE of 17%.

Check out our latest analysis for Laneway Resources

Is Laneway Resources's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, we find that Laneway 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. Independently of how Laneway Resources compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

Laneway Resources delivered an ROCE of 17%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving. You can click on the image below to see (in greater detail) how Laneway Resources's past growth compares to other companies.

When considering this metric, keep in mind that it is backwards looking, and 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. ROCE is, after all, simply a snap shot of a single year. Remember that most companies like Laneway Resources are cyclical businesses. If Laneway Resources is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.