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Today we are going to look at Lena Gold-Mining Public Joint Stock Company Lenzoloto (MCX:LNZL) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, 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.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the 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. 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 Lena Gold-Mining Lenzoloto:
0.092 = RUруб1.7b ÷ (RUруб21b - RUруб1.7b) (Based on the trailing twelve months to December 2018.)
So, Lena Gold-Mining Lenzoloto has an ROCE of 9.2%.
Does Lena Gold-Mining Lenzoloto Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Lena Gold-Mining Lenzoloto's ROCE is fairly close to the Metals and Mining industry average of 9.2%. Regardless of how Lena Gold-Mining Lenzoloto stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
We can see that , Lena Gold-Mining Lenzoloto currently has an ROCE of 9.2%, less than the 26% it reported 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Lena Gold-Mining Lenzoloto's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. We note Lena Gold-Mining Lenzoloto could be considered a cyclical business. If Lena Gold-Mining Lenzoloto is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Lena Gold-Mining Lenzoloto's Current Liabilities Impact 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.
Lena Gold-Mining Lenzoloto has total assets of RUруб21b and current liabilities of RUруб1.7b. As a result, its current liabilities are equal to approximately 8.2% of its total assets. With barely any current liabilities, there is minimal impact on Lena Gold-Mining Lenzoloto's admittedly low ROCE.
Our Take On Lena Gold-Mining Lenzoloto's ROCE
Nonetheless, there may be better places to invest your capital. You might be able to find a better investment than Lena Gold-Mining Lenzoloto. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.