In This Article:
Today we are going to look at Zijin Mining Group Company Limited (HKG:2899) 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.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 Zijin Mining Group:
0.084 = CN¥6.8b ÷ (CN¥118b - CN¥37b) (Based on the trailing twelve months to September 2019.)
Therefore, Zijin Mining Group has an ROCE of 8.4%.
Check out our latest analysis for Zijin Mining Group
Does Zijin Mining Group Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see Zijin Mining Group's ROCE is around the 7.7% average reported by the Metals and Mining industry. Separate from how Zijin Mining Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
We can see that, Zijin Mining Group currently has an ROCE of 8.4% compared to its ROCE 3 years ago, which was 5.7%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Zijin Mining Group's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Remember that most companies like Zijin Mining Group are cyclical businesses. Since the future is so important for investors, you should check out our free report on analyst forecasts for Zijin Mining Group.