MGI Digital Technology Société Anonyme (EPA:ALMDG) Could Be Struggling To Allocate Capital

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. In light of that, when we looked at MGI Digital Technology Société Anonyme (EPA:ALMDG) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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)

0.072 = €9.0m ÷ (€135m - €11m) (Based on the trailing twelve months to June 2022).

Thus, MGI Digital Technology Société Anonyme has an ROCE of 7.2%. Even though it's in line with the industry average of 7.2%, it's still a low return by itself.

See 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'd like, you can check out the forecasts from the analysts covering MGI Digital Technology Société Anonyme here for free.

So How Is MGI Digital Technology Société Anonyme's ROCE Trending?

On the surface, the trend of ROCE at MGI Digital Technology Société Anonyme doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 7.2%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take 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. These growth trends haven't led to growth returns though, since the stock has fallen 46% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

MGI Digital Technology Société Anonyme could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While MGI Digital Technology Société Anonyme may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.