In This Article:
Today we'll look at Bisichi Mining Plc (LON:BISI) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding 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. 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?
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 Bisichi Mining:
0.27 = UK£7.3m ÷ (UK£46m - UK£19m) (Based on the trailing twelve months to June 2019.)
So, Bisichi Mining has an ROCE of 27%.
View our latest analysis for Bisichi Mining
Does Bisichi Mining Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Bisichi Mining's ROCE is meaningfully higher than the 8.7% average in the Oil and Gas industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Bisichi Mining's ROCE in absolute terms currently looks quite high.
In our analysis, Bisichi Mining's ROCE appears to be 27%, compared to 3 years ago, when its ROCE was 1.0%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Bisichi Mining's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Remember that most companies like Bisichi Mining are cyclical businesses. You can check if Bisichi Mining has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.