Should You Like Alacer Gold Corp.’s (TSE:ASR) High Return On Capital Employed?

Simply Wall St

Today we'll evaluate Alacer Gold Corp. (TSE:ASR) 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting 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. 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.

How Do You Calculate Return On Capital Employed?

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 Alacer Gold:

0.12 = US$172m ÷ (US$1.6b - US$137m) (Based on the trailing twelve months to December 2019.)

So, Alacer Gold has an ROCE of 12%.

Check out our latest analysis for Alacer Gold

Is Alacer Gold's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Alacer Gold's ROCE is meaningfully better than the 3.6% average in the Metals and Mining industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Alacer Gold sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Alacer Gold has an ROCE of 12%, but it didn't have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Alacer Gold's past growth compares to other companies.

TSX:ASR Past Revenue and Net Income March 29th 2020

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. We note Alacer Gold could be considered a cyclical business. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Alacer Gold.

How Alacer Gold'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. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Alacer Gold has current liabilities of US$137m and total assets of US$1.6b. Therefore its current liabilities are equivalent to approximately 8.7% of its total assets. In addition to low current liabilities (making a negligible impact on ROCE), Alacer Gold earns a sound return on capital employed.

The Bottom Line On Alacer Gold's ROCE

This is good to see, and while better prospects may exist, Alacer Gold seems worth researching further. There might be better investments than Alacer Gold 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.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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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