Why We Like The Returns At Magontec (ASX:MGL)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Magontec's (ASX:MGL) look very promising so lets take a look.

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. Analysts use this formula to calculate it for Magontec:

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

0.37 = AU$24m ÷ (AU$97m - AU$31m) (Based on the trailing twelve months to September 2022).

Thus, Magontec has an ROCE of 37%. That's a fantastic return and not only that, it outpaces the average of 10.0% earned by companies in a similar industry.

View our latest analysis for Magontec

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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?

Magontec is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 2,334% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On Magontec's ROCE

To sum it up, Magontec is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 33% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Magontec does have some risks though, and we've spotted 2 warning signs for Magontec that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.