In This Article:
Today we'll evaluate Hochschild Mining plc (LON:HOC) to determine whether it could have potential as an investment idea. 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 Hochschild Mining:
0.071 = US$74m ÷ (US$1.3b - US$239m) (Based on the trailing twelve months to December 2018.)
So, Hochschild Mining has an ROCE of 7.1%.
See our latest analysis for Hochschild Mining
Is Hochschild Mining's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Hochschild Mining's ROCE appears meaningfully below the 13% average reported by the Metals and Mining industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Hochschild Mining 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.
Hochschild Mining has an ROCE of 7.1%, but it didn't have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving. The image below shows how Hochschild Mining's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Remember that most companies like Hochschild Mining are cyclical businesses. Since the future is so important for investors, you should check out our free report on analyst forecasts for Hochschild Mining.