What are the early trends we should look for to identify a stock that could 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Magontec (ASX:MGL), it didn't seem to tick all of these boxes.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)
0.039 = AU$1.9m ÷ (AU$73m - AU$24m) (Based on the trailing twelve months to June 2021).
Thus, Magontec has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.3%.
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
Things have been pretty stable at Magontec, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Magontec to be a multi-bagger going forward.
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.
The Bottom Line
In a nutshell, Magontec has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 22% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Magontec has the makings of a multi-bagger.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Magontec (of which 1 makes us a bit uncomfortable!) that you should know about.
While Magontec may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
Valuation is complex, but we're helping make it simple.
Find out whether Magontec is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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Magontec Limited, together with its subsidiaries, engages in the research, development, manufacture, and sale of generic and specialist alloys in Asia, the Americas, Europe, and internationally.
Flawless balance sheet with outstanding track record.