If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at Mangalam Global Enterprise (NSE:MGEL) so let's look a bit deeper.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Mangalam Global Enterprise:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.089 = ₹82m ÷ (₹1.7b - ₹763m) (Based on the trailing twelve months to December 2020).
So, Mangalam Global Enterprise has an ROCE of 8.9%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.
View our latest analysis for Mangalam Global Enterprise
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're interested in investigating Mangalam Global Enterprise's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Mangalam Global Enterprise Tell Us?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 8.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 2,945% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a side note, Mangalam Global Enterprise's current liabilities are still rather high at 45% 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.
In Conclusion...
In summary, it's great to see that Mangalam Global Enterprise can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 29% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Mangalam Global Enterprise can keep these trends up, it could have a bright future ahead.
One final note, you should learn about the 5 warning signs we've spotted with Mangalam Global Enterprise (including 1 which is concerning) .
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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This article by Simply Wall St is general in nature. 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.
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About NSEI:MGEL
Mangalam Global Enterprise
Manufactures, trades, and imports of edible and non-edible oils, and agricultural products India and internationally.
Solid track record and slightly overvalued.
