Magadh Sugar & Energy (NSE:MAGADSUGAR) Could Be Struggling To Allocate Capital

What are the early trends we should look for to identify a stock that could 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Magadh Sugar & Energy (NSE:MAGADSUGAR), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Magadh Sugar & Energy is:

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

0.17 = ₹1.1b ÷ (₹13b - ₹6.2b) (Based on the trailing twelve months to December 2020).

Therefore, Magadh Sugar & Energy has an ROCE of 17%. 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 want to delve into the historical earnings, revenue and cash flow of Magadh Sugar & Energy, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at Magadh Sugar & Energy, we didn't gain much confidence. To be more specific, ROCE has fallen from 37% over the last four years. However it looks like Magadh Sugar & Energy might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

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.

What We Can Learn From Magadh Sugar & Energy's ROCE

Bringing it all together, while we're somewhat encouraged by Magadh Sugar & Energy's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 162% gain to shareholders who have held over the last three years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we found 5 warning signs for Magadh Sugar & Energy (1 makes us a bit uncomfortable) you should be aware of.

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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