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How Do Swick Mining Services Limited’s (ASX:SWK) Returns Compare To Its Industry?

Today we'll look at Swick Mining Services Limited (ASX:SWK) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. 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. Generally speaking a higher ROCE is better. 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?

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 Swick Mining Services:

0.03 = AU$3.4m ÷ (AU$141m - AU$27m) (Based on the trailing twelve months to June 2019.)

Therefore, Swick Mining Services has an ROCE of 3.0%.

View our latest analysis for Swick Mining Services

Does Swick Mining Services Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Swick Mining Services's ROCE appears to be significantly below the 8.0% average in the Metals and Mining industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Swick Mining Services compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.1% available in government bonds. There are potentially more appealing investments elsewhere.

Swick Mining Services reported an ROCE of 3.0% -- better than 3 years ago, when the company didn't make a profit. That suggests the business has returned to profitability. The image below shows how Swick Mining Services's ROCE compares to its industry, and you can click it to see more detail on its past growth.

ASX:SWK Past Revenue and Net Income, January 23rd 2020
ASX:SWK Past Revenue and Net Income, January 23rd 2020

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Remember that most companies like Swick Mining Services are cyclical businesses. If Swick Mining Services is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Do Swick Mining Services's Current Liabilities Skew Its ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Swick Mining Services has total liabilities of AU$27m and total assets of AU$141m. As a result, its current liabilities are equal to approximately 19% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

Our Take On Swick Mining Services's ROCE

That's not a bad thing, however Swick Mining Services has a weak ROCE and may not be an attractive investment. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

Swick Mining Services is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.

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.

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.