Why You Should Care About Monument Mining Limited’s (CVE:MMY) Low Return On Capital

Simply Wall St

Today we are going to look at Monument Mining Limited (CVE:MMY) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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?

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 Monument Mining:

0.0093 = US$2.3m ÷ (US$253m - US$6.4m) (Based on the trailing twelve months to December 2018.)

Therefore, Monument Mining has an ROCE of 0.9%.

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Does Monument Mining Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Monument Mining's ROCE appears meaningfully below the 2.8% average reported by the Metals and Mining industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Monument Mining compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.9% available in government bonds. There are potentially more appealing investments elsewhere.

As we can see, Monument Mining currently has an ROCE of 0.9%, less than the 3.7% it reported 3 years ago. This makes us wonder if the business is facing new challenges.

TSXV:MMY Past Revenue and Net Income, May 22nd 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. We note Monument Mining could be considered a cyclical business. How cyclical is Monument Mining? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

How Monument Mining's Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Monument Mining has total liabilities of US$6.4m and total assets of US$253m. Therefore its current liabilities are equivalent to approximately 2.5% of its total assets. Monument Mining has a low level of current liabilities, which have a negligible impact on its already low ROCE.

Our Take On Monument Mining's ROCE

Nevertheless, there are potentially more attractive companies to invest in. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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

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 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. Thank you for reading.