Returns on Capital Paint A Bright Future For MG International (EPA:ALMGI)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of MG International (EPA:ALMGI) 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. 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%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 13%.

Check out 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'd like to look at how MG International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

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

Investors would be pleased with what's happening at MG International. The numbers show that in the last five years, the returns generated on capital employed have grown considerably 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.

Our Take 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 a remarkable 153% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for MG International (of which 1 makes us a bit uncomfortable!) that you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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

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.