Yahoo Finance How Has Magontec (ASX:MGL) Allocated Its Capital?
Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Magontec (ASX:MGL), so let's see why.
Return On Capital Employed (ROCE): What is it?
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. Analysts use this formula to calculate it for Magontec:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0027 = AU$136k ÷ (AU$75m - AU$25m) (Based on the trailing twelve months to December 2020).
Therefore, Magontec has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 12%.
See our latest analysis for Magontec
Historical performance is a great place to start when researching a stock so above you can see the gauge for Magontec's ROCE against it's prior returns. If you'd like to look at how Magontec has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
There is reason to be cautious about Magontec, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 0.8% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Magontec to turn into a multi-bagger.
On a side note, Magontec has done well to pay down its current liabilities to 33% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Key Takeaway
In summary, it's unfortunate that Magontec is generating lower returns from the same amount of capital.
On a final note, we found 3 warning signs for Magontec (1 doesn't sit too well with us) you should be aware of.
While Magontec isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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. 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.
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