MG International (EPA:ALMGI) Has More To Do To Multiply In Value Going Forward

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at MG International's (EPA:ALMGI) ROCE trend, we were pretty happy with what we saw.

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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. Analysts use this formula to calculate it for MG International:

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

0.12 = €4.5m ÷ (€43m - €6.5m) (Based on the trailing twelve months to December 2023).

Therefore, MG International has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 10% generated by the Consumer Durables industry.

See our latest analysis for MG International

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're interested in investigating MG International's past further, check out this free graph covering MG International's past earnings, revenue and cash flow.

What Can We Tell From MG International's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 84% more capital in the last five years, and the returns on that capital have remained stable at 12%. 12% is a pretty standard return, and it provides some comfort knowing that MG International has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 15% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

The main thing to remember is that MG International has proven its ability to continually reinvest at respectable rates of return. However, over the last five years, the stock has only delivered a 26% return to shareholders who held over that period. So to determine if MG International is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

MG International does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

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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.