We love these underlying trends in return on capital at Magnum Ventures (NSE: MAGNUM)
If you are looking for a multi-bagger, there are a few things to look out for. In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. Speaking of which, we have noticed some big changes in Magnum Ventures’ (NSE: MAGNUM) looks back at the capital, so let’s take a look.
Return on capital employed (ROCE): what is it?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. To calculate this metric for Magnum Ventures, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.0085 = â¹ 18m Ã· (â¹ 3.2b – â¹ 1.0b) (Based on the last twelve months up to March 2021).
Therefore, Magnum Ventures has a ROCE of 0.9%. At the end of the day, that’s a low yield and it’s 10% below the forest industry average.
Check out our latest review for Magnum Ventures
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 take a look at how Magnum Ventures performed in the past in other metrics, you can check out this free graph of past income, income and cash flow.
What is the trend of returns?
We are delighted to see that Magnum Ventures is reaping the benefits of its investments and is now generating pre-tax profits. Shareholders will no doubt be delighted because the company was in deficit five years ago but now generates 0.9% of its capital. Not only that, but the business is using 27% more capital than before, but that’s to be expected of a business trying to become profitable. This may tell us that the company has plenty of reinvestment opportunities capable of generating higher returns.
In another part of our analysis, we noticed that the ratio of the company’s current liabilities to total assets decreased to 32%, which means overall that the company is less dependent on its suppliers or of its short-term creditors to finance its operations. Therefore, we can be assured that ROCE growth is the result of fundamental company improvements, rather than a cooking class featuring that company’s books.
What we can learn from Magnum Ventures’ ROCE
In short, we are delighted to see that Magnum Ventures’ reinvestment activities have paid off and that the company is now profitable. And a remarkable 165% total return over the past five years tells us that investors expect more good things to come in the future. Therefore, we believe it would be worth checking whether these trends will continue.
If you’re interested in learning more about Magnum Ventures, we’ve spotted 4 warning signs, and 3 of them don’t sit too well with us.
While Magnum Ventures does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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