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Today we are going to look at Zijin Mining Group Company Limited (HKG:2899) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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.'
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 Zijin Mining Group:
0.10 = CN¥7.8b ÷ (CN¥113b - CN¥37b) (Based on the trailing twelve months to December 2018.)
Therefore, Zijin Mining Group has an ROCE of 10%.
View our latest analysis for Zijin Mining Group
Does Zijin Mining Group Have A Good ROCE?
One way to assess ROCE is to compare similar companies. It appears that Zijin Mining Group's ROCE is fairly close to the Metals and Mining industry average of 11%. Separate from Zijin Mining Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
In our analysis, Zijin Mining Group's ROCE appears to be 10%, compared to 3 years ago, when its ROCE was 4.0%. This makes us wonder if the company is improving.
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. ROCE is, after all, simply a snap shot of a single year. We note Zijin Mining Group 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 Zijin Mining Group.
Zijin Mining Group's Current Liabilities And Their Impact On 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 counter this, investors can check if a company has high current liabilities relative to total assets.