Stock Analysis

What We Make Of Mount Gibson Iron's (ASX:MGX) Returns On Capital

  •  Updated
ASX:MGX
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Speaking of which, we noticed some great changes in Mount Gibson Iron's (ASX:MGX) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Mount Gibson Iron, this is the formula:

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

0.14 = AU$104m ÷ (AU$805m - AU$81m) (Based on the trailing twelve months to June 2020).

Therefore, Mount Gibson Iron has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Metals and Mining industry.

Check out our latest analysis for Mount Gibson Iron

roce
ASX:MGX Return on Capital Employed January 13th 2021

In the above chart we have measured Mount Gibson Iron's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Mount Gibson Iron.

How Are Returns Trending?

We're delighted to see that Mount Gibson Iron is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 14% on its capital. In addition to that, Mount Gibson Iron is employing 110% more capital than previously which is expected of a company that's trying to break into profitability. 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.

What We Can Learn From Mount Gibson Iron's ROCE

Long story short, we're delighted to see that Mount Gibson Iron's reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Mount Gibson Iron can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Mount Gibson Iron, we've discovered 4 warning signs that you should be aware of.

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