Today we'll look at Coronado Global Resources Inc. (ASX:CRN) and reflect on its potential as an investment. 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 up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Return On Capital Employed (ROCE): What is it?

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. In brief, it is a useful tool, but it is not without drawbacks. 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?

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 Coronado Global Resources:

0.34 = US$587m ÷ (US$2.2b - US$422m) (Based on the trailing twelve months to September 2019.)

So, Coronado Global Resources has an ROCE of 34%.

See our latest analysis for Coronado Global Resources

Does Coronado Global Resources Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Coronado Global Resources's ROCE appears to be substantially greater than the 8.0% average in the Metals and Mining industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, Coronado Global Resources's ROCE currently appears to be excellent.

The image below shows how Coronado Global Resources'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. ROCE is only a point-in-time measure. We note Coronado Global Resources could be considered a cyclical business. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect Coronado Global Resources's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Coronado Global Resources has total assets of US$2.2b and current liabilities of US$422m. As a result, its current liabilities are equal to approximately 19% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.

What We Can Learn From Coronado Global Resources's ROCE

With low current liabilities and a high ROCE, Coronado Global Resources could be worthy of further investigation. There might be better investments than Coronado Global Resources out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

I will like Coronado Global Resources better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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