If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Majestic Gold (CVE:MJS) we really liked what we saw.
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. The formula for this calculation on Majestic Gold is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = US$28m ÷ (US$131m - US$21m) (Based on the trailing twelve months to June 2022).
Thus, Majestic Gold has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 3.6%.
Check out the opportunities and risks within the CA Metals and Mining industry.
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 want to delve into the historical earnings, revenue and cash flow of Majestic Gold, check out these free graphs here.
How Are Returns Trending?
Majestic Gold is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 26%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 52%. So we're very much inspired by what we're seeing at Majestic Gold thanks to its ability to profitably reinvest capital.
One more thing to note, Majestic Gold has decreased current liabilities to 16% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Bottom Line
All in all, it's terrific to see that Majestic Gold is reaping the rewards from prior investments and is growing its capital base.
On a final note, we've found 3 warning signs for Majestic Gold that we think you should be aware of.
Majestic Gold is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
About TSXV:MJS
Majestic Gold
A mining company, focuses on exploration, development, and operation of mining properties in China, Australia, and Canada.
Flawless balance sheet and good value.
