Magnitogorsk Iron & Steel Works (MCX:MAGN) Knows How To Allocate Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Magnitogorsk Iron & Steel Works' (MCX:MAGN) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Magnitogorsk Iron & Steel Works:

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

0.47 = US$3.3b ÷ (US$8.9b - US$1.8b) (Based on the trailing twelve months to September 2021).

Therefore, Magnitogorsk Iron & Steel Works has an ROCE of 47%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

See our latest analysis for Magnitogorsk Iron & Steel Works

Above you can see how the current ROCE for Magnitogorsk Iron & Steel Works compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Magnitogorsk Iron & Steel Works.

The Trend Of ROCE

We like the trends that we're seeing from Magnitogorsk Iron & Steel Works. The data shows that returns on capital have increased substantially over the last five years to 47%. Basically the business is earning more per dollar of capital invested and in addition to that, 42% 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.

The Key Takeaway

To sum it up, Magnitogorsk Iron & Steel Works has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 248% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Magnitogorsk Iron & Steel Works can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 3 warning signs we've spotted with Magnitogorsk Iron & Steel Works (including 2 which are concerning) .

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.