Yahoo Finance Why Magontec Limited’s (ASX:MGL) Use Of Investor Capital Doesn’t Look Great
Today we are going to look at Magontec Limited (ASX:MGL) to see whether it might be an attractive investment prospect. 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.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
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 Magontec:
0.024 = AU$1.4m ÷ (AU$90m - AU$32m) (Based on the trailing twelve months to June 2019.)
So, Magontec has an ROCE of 2.4%.
See our latest analysis for Magontec
Is Magontec's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Magontec'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. Putting aside Magontec's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
Magontec's current ROCE of 2.4% is lower than 3 years ago, when the company reported a 3.9% ROCE. So investors might consider if it has had issues recently. You can see in the image below how Magontec's ROCE compares to its industry. Click to see more on past growth.
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. ROCE is only a point-in-time measure. Given the industry it operates in, Magontec could be considered cyclical. How cyclical is Magontec? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Magontec's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Magontec has total liabilities of AU$32m and total assets of AU$90m. Therefore its current liabilities are equivalent to approximately 35% of its total assets. With a medium level of current liabilities boosting the ROCE a little, Magontec's low ROCE is unappealing.
What We Can Learn From Magontec's ROCE
There are likely better investments out there. You might be able to find a better investment than Magontec. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.
