There are a few key trends to look for if we are to identify the next multi-bagger. A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in line with growth amount capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits 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 little deeper.
What is Return on Employee Capital (ROCE)?
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. To calculate this metric for Magadanenergo, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.13 = ₽1.1b ÷ (₽11b – ₽2.4b) (Based on the last twelve months up to December 2020).
Thereby, Magadanenergo has a ROCE of 13%. On its own, that’s standard efficiency, but it’s far better than the 8.5% generated by the electric utility industry.
Discover our latest analysis for Magadanenergo
Although the past is not representative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to investigate more about Magadanenergo’s past, check out this free graph of past income, income and cash flow.
How are the returns evolving?
The fact that Magadanenergo is now generating pre-tax profits on its previous investments is very encouraging. About five years ago the company was making losses, but things have changed as it now earns 13% on its equity. Not only that, but the business is using 295% more capital than before, but that’s to be expected of a business trying to achieve profitability. This may indicate that there are many opportunities to invest capital internally and at ever higher rates, two common characteristics of a multi-bagger.
One more thing to note, Magadanenergo reduced current liabilities to 23% of total assets over this period, effectively reducing the amount of financing from suppliers or short-term creditors. This tells us that Magadanenergo has increased its returns without depending on the increase in its short-term liabilities, which we are very happy with.
The key to take away
In short, we are delighted to see that Magadanenergo’s reinvestment activities have borne fruit and that the company is now profitable. Given that the stock has returned 151% to shareholders over the past five years, it looks like investors are recognizing these changes. So, given that the stock has proven to have some promising trends, it is worth doing more research on the company to see if these trends are likely to continue.
One last thing to note, we have 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 it out free list of companies with strong balance sheets and high returns on equity.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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