Is Magadh Sugar & Energy (NSE:MAGADSUGAR) Likely To Turn Things Around?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Magadh Sugar & Energy (NSE:MAGADSUGAR) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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 Magadh Sugar & Energy:

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

0.18 = ₹1.1b ÷ (₹13b - ₹6.2b) (Based on the trailing twelve months to September 2020).

Thus, Magadh Sugar & Energy has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 12% it's much better.

See our latest analysis for Magadh Sugar & Energy

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 Magadh Sugar & Energy 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 Magadh Sugar & Energy's ROCE Trend?

In terms of Magadh Sugar & Energy's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 24%, but since then they've fallen to 18%. 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.

On a side note, Magadh Sugar & Energy's current liabilities are still rather high at 49% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Magadh Sugar & Energy's ROCE

While returns have fallen for Magadh Sugar & Energy in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 3.7% gain to shareholders who've held over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you want to know some of the risks facing Magadh Sugar & Energy we've found 4 warning signs (1 is potentially serious!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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