Magnum Ventures (NSE:MAGNUM) Shareholders Will Want The ROCE Trajectory To Continue

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Magnum Ventures (NSE:MAGNUM) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Magnum Ventures, this is the formula:

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

0.048 = ₹94m ÷ (₹3.2b - ₹1.3b) (Based on the trailing twelve months to June 2022).

So, Magnum Ventures has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 12%.

See our latest analysis for Magnum Ventures

Historical performance is a great place to start when researching a stock so above you can see the gauge for Magnum Ventures' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Magnum Ventures, check out these free graphs here.

So How Is Magnum Ventures' ROCE Trending?

We're delighted to see that Magnum Ventures is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 4.8% which is no doubt a relief for some early shareholders. In regards to capital employed, Magnum Ventures is using 28% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 40% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Key Takeaway

In the end, Magnum Ventures has proven it's capital allocation skills are good with those higher returns from less amount of capital. Considering the stock has delivered 7.5% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you want to know some of the risks facing Magnum Ventures we've found 5 warning signs (3 are a bit unpleasant!) that you should be aware of before investing here.

While Magnum Ventures 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.