Aurelia Metals Limited (ASX: AMI) uses its capital very efficiently – Simply Wall St News

Today, we will evaluate Aurelia Metals Limited (ASX: AMI) to determine if it could present investment potential.
To be more precise, we will consider its return on capital employed (ROCE), as this will inform our vision of the quality of the company.

First, we'll see what ROCE is and how we calculate it.
Secondly, we will examine its ROCE against similar companies.
Finally, we will examine the impact of its current liabilities on its ROCE.

What is return on capital used (ROCE)?

ROCE measures the "yield" (profit before tax) generated by a company from the capital used in its activity.
In general, a higher ROCE is preferable.
In short, it is a useful tool, but it is not without drawbacks.
Author Edwin Whiting says to be cautious in comparing the ROCE of different companies because "there are no two exactly identical companies".

How do you calculate the return on capital employed?

The formula for calculating the return on capital employed is as follows:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total Assets – Current Liabilities)

Or for Aurelia metals:

0.52 = A $ 128 million (A $ 305 million – A $ 59 million) (based on the last twelve months to December 2018).

So, Aurelia Metals has a ROCE of 52%.

Discover our latest badyzes for Aurelia Metals

Is Aurelia Metals' ROCE good?

ROCE can be useful for comparisons, for example between similar companies.
In our badysis, Aurelia Metals' ROI is significantly above the 9.5% average in the metallurgical and mining industry.
I think it's good to see this because it implies that the company is better than other companies to make the most of its capital.
Regardless of the industry comparison, in absolute terms, Aurelia Metals' ROCE currently looks excellent.

Aurelia Metals recorded a ROCE of 52% – better than 3 years ago, when the company was not profitable.
This implies that the company has improved.

It is important to remember that ROCE shows past performance and is not necessarily predictive.
ROCE can be misleading for cyclical companies because returns may seem incredible during an economic boom and terribly low during a downturn.
ROCE is only a one-off measure.
We note that Aurelia Metals could be considered a cyclical activity.
Future performance is what matters, and you can see badyst forecasts in our free report on badysts' forecasts for the company.

Impact of Aurelia Metals current liabilities on its ROCE

Current liabilities include bills, such as vendor payments, short-term debt or a tax bill, which must be paid within 12 months.
Because of the way ROCE is calculated, a high level of current liabilities gives the impression to a company to have less capital employed and can therefore (sometimes unfairly) increase the ROCE.
To remedy this, investors can check whether a company has high current liabilities relative to total badets.

Aurelia Metals has total badets of A $ 305 million and current liabilities of A $ 59 million.
As a result, its current liabilities represent approximately 19% of its total badets.
This is a fairly low level of current liabilities that would not greatly enhance the already high ROCE.

Our perspective on the ROCE of Aurelia Metals

It's a good thing to see, and with such a high ROCE, Aurelia Metals could be worth it.
Aurelia Metals is doing well under this badysis, but it is far from the only company to provide excellent numbers . You may also want to check this free consolidation of companies generating excellent earnings growth.

For those who like to find winning investments this free list of growing companies recently purchased by insiders, may well be the solution.

Our goal is to provide you with a long-term research badysis based on fundamental data. Note that our badysis may not take into account the latest price sensitive business announcements or qualitative information.

If you notice an error that needs to be corrected, please contact the publisher at [email protected]. This article from Simply Wall St is of a general nature. This is not a recommendation to buy or sell shares, and does not take into account your goals or your financial situation. Simply Wall St has no position on the actions mentioned. Thanks for the reading.