Why China Vanadium Titano-Magnetite Mining Company Limited’s (HKG:893) Use Of Investor Capital Doesn’t Look Great

Today we’ll look at China Vanadium Titano-Magnetite Mining Company Limited (HKG:893) 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, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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.

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 China Vanadium Titano-Magnetite Mining:

0.018 = CN¥16m ÷ (CN¥2.4b – CN¥1.6b) (Based on the trailing twelve months to June 2019.)

So, China Vanadium Titano-Magnetite Mining has an ROCE of 1.8%.

Check out our latest analysis for China Vanadium Titano-Magnetite Mining

Does China Vanadium Titano-Magnetite Mining Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, China Vanadium Titano-Magnetite Mining’s ROCE appears to be significantly below the 7.6% average in the Metals and Mining industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how China Vanadium Titano-Magnetite Mining compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. Readers may wish to look for more rewarding investments.

China Vanadium Titano-Magnetite Mining delivered an ROCE of 1.8%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how China Vanadium Titano-Magnetite Mining’s past growth compares to other companies.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. Given the industry it operates in, China Vanadium Titano-Magnetite Mining could be considered cyclical. How cyclical is China Vanadium Titano-Magnetite Mining? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

China Vanadium Titano-Magnetite Mining’s Current Liabilities And Their Impact On 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 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.

China Vanadium Titano-Magnetite Mining has total liabilities of CN¥1.6b and total assets of CN¥2.4b. As a result, its current liabilities are equal to approximately 64% of its total assets. China Vanadium Titano-Magnetite Mining has a fairly high level of current liabilities, boosting its ROCE.