TextMagic (TAL:MAGIC) Is Doing The Right Things To Multiply Its Share Price

What trends should we look for it we want to identify stocks that can 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, TextMagic (TAL:MAGIC) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for TextMagic, this is the formula:

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

0.074 = €2.6m ÷ (€40m - €3.8m) (Based on the trailing twelve months to December 2023).

So, TextMagic has an ROCE of 7.4%. Ultimately, that's a low return and it under-performs the Software industry average of 13%.

See our latest analysis for TextMagic

Historical performance is a great place to start when researching a stock so above you can see the gauge for TextMagic's ROCE against it's prior returns. If you're interested in investigating TextMagic's past further, check out this free graph covering TextMagic's past earnings, revenue and cash flow.

What Can We Tell From TextMagic's ROCE Trend?

It's great to see that TextMagic has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 7.4% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 35%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

In Conclusion...

In a nutshell, we're pleased to see that TextMagic has been able to generate higher returns from less capital. And since the stock has fallen 41% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

TextMagic does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com