Today we’ll look at Wheaton Precious Metals Corp. (TSE:WPM) and reflect on its potential as an investment. 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. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
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. 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.
So, How Do We Calculate ROCE?
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 Wheaton Precious Metals:
0.014 = US$88m ÷ (US$6.3b – US$34m) (Based on the trailing twelve months to September 2019.)
So, Wheaton Precious Metals has an ROCE of 1.4%.
See our latest analysis for Wheaton Precious Metals
Is Wheaton Precious Metals’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Wheaton Precious Metals’s ROCE is meaningfully below the Metals and Mining industry average of 3.2%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Wheaton Precious Metals’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
Wheaton Precious Metals’s current ROCE of 1.4% is lower than 3 years ago, when the company reported a 4.3% ROCE. This makes us wonder if the business is facing new challenges. You can see in the image below how Wheaton Precious Metals’s ROCE compares to its industry. Click to see more on past growth.
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. Remember that most companies like Wheaton Precious Metals are cyclical businesses. Since the future is so important for investors, you should check out our free report on analyst forecasts for Wheaton Precious Metals.
Do Wheaton Precious Metals’s Current Liabilities Skew 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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Wheaton Precious Metals has total liabilities of US$34m and total assets of US$6.3b. As a result, its current liabilities are equal to approximately 0.5% of its total assets. Wheaton Precious Metals has very few current liabilities, which have a minimal effect on its already low ROCE.
The Bottom Line On Wheaton Precious Metals’s ROCE
Nonetheless, there may be better places to invest your capital. Of course, you might also be able to find a better stock than Wheaton Precious Metals. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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. Thank you for reading.
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