There Are Reasons To Feel Uneasy About Magadh Sugar & Energy's (NSE:MAGADSUGAR) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 briefly looking over the numbers, we don't think Magadh Sugar & Energy (NSE:MAGADSUGAR) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Magadh Sugar & Energy, this is the formula:

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

0.14 = ₹1.1b ÷ (₹13b - ₹5.7b) (Based on the trailing twelve months to June 2022).

So, Magadh Sugar & Energy has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 13% generated by the Food industry.

Check out our latest analysis for Magadh Sugar & Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for Magadh Sugar & Energy's ROCE against it's prior returns. 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 Does the ROCE Trend For Magadh Sugar & Energy Tell Us?

In terms of Magadh Sugar & Energy's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 14% from 21% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Magadh Sugar & Energy's current liabilities are still rather high at 42% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

To conclude, we've found that Magadh Sugar & Energy is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 114% gain to shareholders who have held over the last five 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 4 warning signs for Magadh Sugar & Energy (1 is significant) you should be aware of.

While Magadh Sugar & Energy 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.