Should We Be Excited About The Trends Of Returns At Magellan Aerospace (TSE:MAL)?

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Magellan Aerospace (TSE:MAL), we don't think it's current trends fit the mold of a multi-bagger.

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 Magellan Aerospace, this is the formula:

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

0.089 = CA$88m ÷ (CA$1.2b - CA$201m) (Based on the trailing twelve months to March 2020).

So, Magellan Aerospace has an ROCE of 8.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.2%.

Check out our latest analysis for Magellan Aerospace

Above you can see how the current ROCE for Magellan Aerospace 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 Magellan Aerospace.

So How Is Magellan Aerospace's ROCE Trending?

On the surface, the trend of ROCE at Magellan Aerospace doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.9% from 13% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that Magellan Aerospace is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 62% in the last five years. Therefore based on the analysis done in this article, we don't think Magellan Aerospace has the makings of a multi-bagger.

If you want to know some of the risks facing Magellan Aerospace we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.

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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