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Investors Should Be Encouraged By Mangazeya Mining's (CVE:MGZ.H) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Mangazeya Mining's (CVE:MGZ.H) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Mangazeya Mining is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.30 = CA$91m ÷ (CA$394m - CA$89m) (Based on the trailing twelve months to December 2021).

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So, Mangazeya Mining has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 2.4% earned by companies in a similar industry.

View our latest analysis for Mangazeya Mining

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Historical performance is a great place to start when researching a stock so above you can see the gauge for Mangazeya Mining's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Mangazeya Mining, check out these free graphs here.

So How Is Mangazeya Mining's ROCE Trending?

Investors would be pleased with what's happening at Mangazeya Mining. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 30%. Basically the business is earning more per dollar of capital invested and in addition to that, 251% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 22% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Key Takeaway

In summary, it's great to see that Mangazeya Mining can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Astute investors may have an opportunity here because the stock has declined 33% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Like most companies, Mangazeya Mining does come with some risks, and we've found 3 warning signs that you should be aware of.

Mangazeya Mining is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.