Some Investors May Be Worried About Mangazeya Mining's (CVE:MGZ.H) Returns On Capital

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Mangazeya Mining (CVE:MGZ.H), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 Mangazeya Mining, this is the formula:

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

0.14 = CA$39m ÷ (CA$331m - CA$60m) (Based on the trailing twelve months to September 2020).

So, Mangazeya Mining has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 2.6% it's much better.

Check out our latest analysis for Mangazeya Mining

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mangazeya Mining's ROCE against it's prior returns. If you'd like to look at how Mangazeya Mining has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Mangazeya Mining Tell Us?

When we looked at the ROCE trend at Mangazeya Mining, we didn't gain much confidence. Around four years ago the returns on capital were 23%, but since then they've fallen to 14%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Mangazeya Mining's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Mangazeya Mining. And long term investors must be optimistic going forward because the stock has returned a huge 125% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing Mangazeya Mining we've found 3 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

While Mangazeya Mining 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.

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This article by Simply Wall St is general in nature. 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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