Magontec (ASX:MGL) Shareholders Will Want The ROCE Trajectory To Continue

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Magontec (ASX:MGL) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)

0.13 = AU$8.8m ÷ (AU$91m - AU$21m) (Based on the trailing twelve months to June 2023).

So, Magontec has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Metals and Mining industry.

View 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're interested in investigating Magontec's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Magontec's ROCE Trending?

We're delighted to see that Magontec is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 13% on its capital. And unsurprisingly, like most companies trying to break into the black, Magontec is utilizing 22% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 23%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Magontec has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

To the delight of most shareholders, Magontec has now broken into profitability. Since the stock has only returned 18% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Magontec does have some risks though, and we've spotted 3 warning signs for Magontec that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.