Returns On Capital At Magontec (ASX:MGL) Have Hit The Brakes

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Magontec (ASX:MGL), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Magontec, this is the formula:

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

0.039 = AU$1.9m ÷ (AU$73m - AU$24m) (Based on the trailing twelve months to June 2021).

So, Magontec has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 9.4%.

View our latest analysis for Magontec

roce

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 want to delve into the historical earnings, revenue and cash flow of Magontec, check out these free graphs here.

So How Is Magontec's ROCE Trending?

There hasn't been much to report for Magontec's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Magontec in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

On a side note, Magontec has done well to reduce current liabilities to 33% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

What We Can Learn From Magontec's ROCE

We can conclude that in regards to Magontec's returns on capital employed and the trends, there isn't much change to report on. Unsurprisingly then, the total return to shareholders over the last five years has been flat. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Magontec does have some risks, we noticed 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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. 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.

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