Capital Allocation Trends At Mangazeya Mining (CVE:MGZ.H) Aren't Ideal
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Mangazeya Mining (CVE:MGZ.H) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Mangazeya Mining:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = CA$39m ÷ (CA$331m - CA$60m) (Based on the trailing twelve months to September 2020).
Thus, Mangazeya Mining has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 1.6% it's much better.
See our latest analysis for Mangazeya Mining
Historical performance is a great place to start when researching a stock so above you can see the gauge for Mangazeya Mining's ROCE against it's prior returns. If you're interested in investigating Mangazeya Mining's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of Mangazeya Mining's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 23% over the last four years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Key Takeaway
While returns have fallen for Mangazeya Mining in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 88% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
If you want to know some of the risks facing Mangazeya Mining we've found 4 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.
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. 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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