The Return Trends At Magic Software Enterprises (NASDAQ:MGIC) Look Promising
What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Magic Software Enterprises' (NASDAQ:MGIC) returns on capital, so let's have a look.
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. The formula for this calculation on Magic Software Enterprises is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$45m ÷ (US$455m - US$104m) (Based on the trailing twelve months to March 2021).
So, Magic Software Enterprises has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 11% generated by the Software industry.
See our latest analysis for Magic Software Enterprises
In the above chart we have measured Magic Software Enterprises' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Magic Software Enterprises here for free.
What Does the ROCE Trend For Magic Software Enterprises Tell Us?
Magic Software Enterprises is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 64% 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 Bottom Line
In summary, it's great to see that Magic Software Enterprises can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 164% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing to note, we've identified 1 warning sign with Magic Software Enterprises and understanding it 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. 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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