Capital Allocation Trends At MGI Digital Technology Société Anonyme (EPA:ALMDG) Aren't Ideal

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at MGI Digital Technology Société Anonyme (EPA:ALMDG), it didn't seem to tick all of these boxes.

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Understanding 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. Analysts use this formula to calculate it for MGI Digital Technology Société Anonyme:

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

0.07 = €10m ÷ (€170m - €21m) (Based on the trailing twelve months to December 2024).

So, MGI Digital Technology Société Anonyme has an ROCE of 7.0%. Even though it's in line with the industry average of 7.0%, it's still a low return by itself.

View our latest analysis for MGI Digital Technology Société Anonyme

Above you can see how the current ROCE for MGI Digital Technology Société Anonyme compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for MGI Digital Technology Société Anonyme .

What Can We Tell From MGI Digital Technology Société Anonyme's ROCE Trend?

In terms of MGI Digital Technology Société Anonyme's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 17%, but since then they've fallen to 7.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On MGI Digital Technology Société Anonyme's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for MGI Digital Technology Société Anonyme. And there could be an opportunity here if other metrics look good too, because the stock has declined 69% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for MGI Digital Technology Société Anonyme (of which 1 can't be ignored!) that you should know about.

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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.