Magadanenergo's (MCX:MAGE) Returns On Capital Are Heading Higher

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Magadanenergo (MCX:MAGE) so let's look a bit deeper.

What is 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. To calculate this metric for Magadanenergo, this is the formula:

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

0.13 = ₽1.1b ÷ (₽11b - ₽2.4b) (Based on the trailing twelve months to December 2020).

Thus, Magadanenergo has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Electric Utilities industry.

Check out our latest analysis for Magadanenergo

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 Magadanenergo's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The fact that Magadanenergo is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 13% on its capital. Not only that, but the company is utilizing 295% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Magadanenergo has decreased current liabilities to 23% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Magadanenergo has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

Long story short, we're delighted to see that Magadanenergo's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 151% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 4 warning signs with Magadanenergo and understanding them should be part of your investment process.

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.

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.

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