Stock Analysis

Returns Are Gaining Momentum At Mount Gibson Iron (ASX:MGX)

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ASX:MGX
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. With that in mind, we've noticed some promising trends at Mount Gibson Iron (ASX:MGX) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Mount Gibson Iron:

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

0.13 = AU$101m ÷ (AU$898m - AU$123m) (Based on the trailing twelve months to June 2021).

So, Mount Gibson Iron has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Metals and Mining industry.

See our latest analysis for Mount Gibson Iron

roce
ASX:MGX Return on Capital Employed December 10th 2021

Above you can see how the current ROCE for Mount Gibson Iron compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Mount Gibson Iron.

What Does the ROCE Trend For Mount Gibson Iron Tell Us?

We're delighted to see that Mount Gibson Iron 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, Mount Gibson Iron is utilizing 80% 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.

Our Take On Mount Gibson Iron's ROCE

Overall, Mount Gibson Iron gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Considering the stock has delivered 40% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing: We've identified 4 warning signs with Mount Gibson Iron (at least 1 which is concerning) , and understanding these would certainly be useful.

While Mount Gibson Iron isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether Mount Gibson Iron 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.

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