I am writing today to help inform people who are new to the stock market and want to begin learning the link between Mangata Holding SA (WSE:MGT)’s return fundamentals and stock market performance.
Buying Mangata Holding makes you a partial owner of the company. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Therefore, looking at how efficiently Mangata Holding is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
Calculating Return On Capital Employed for MGT
When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Mangata Holding is good at growing investor capital. MGT’s ROCE is calculated below:
ROCE Calculation for MGT
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = zł60m ÷ (zł718m – zł189m) = 11%
The calculation above shows that MGT’s earnings were 11% of capital employed. A good ROCE hurdle you should aim for in your investments is 15%, which MGT has just fallen short of, meaning the company creates an unideal amount of earnings from capital employed.
Why is this the case?
The underperforming ROCE is not ideal for Mangata Holding investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, MGT’s ROCE may increase, in which case your portfolio could benefit from holding the company. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. If you go back three years, you’ll find that MGT’s ROCE has decreased from 11%. Over the same period, EBT went from zł33m to zł60m but capital employed has increased by a proportionally greater amount as a result of a rise in total assets , indicating that the previous growth in earnings has not been able to improve ROCE because the company now needs to employ more capital to operate the business.
ROCE for MGT investors has fallen in the last few years and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. However, it is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate MGT or move on to other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for MGT’s future growth? Take a look at our free research report of analyst consensus for MGT’s outlook.
- Valuation: What is MGT worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether MGT is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.