MG International (EPA:ALMGI) Is Very Good At Capital Allocation

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at MG International's (EPA:ALMGI) look very promising so lets take a look.

What Is 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. To calculate this metric for MG International, this is the formula:

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

0.24 = €7.8m ÷ (€49m - €16m) (Based on the trailing twelve months to December 2022).

So, MG International has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 18% earned by companies in a similar industry.

Check out our latest analysis for MG International

Historical performance is a great place to start when researching a stock so above you can see the gauge for MG International's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of MG International, check out these free graphs here.

So How Is MG International's ROCE Trending?

The trends we've noticed at MG International are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 24%. Basically the business is earning more per dollar of capital invested and in addition to that, 127% more capital is being employed now too. So we're very much inspired by what we're seeing at MG International thanks to its ability to profitably reinvest capital.

The Bottom Line On MG International's ROCE

To sum it up, MG International has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to know some of the risks facing MG International we've found 4 warning signs (2 are potentially serious!) that you should be aware of before investing here.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.