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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Mount Gibson Iron (ASX:MGX) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. Analysts use this formula to calculate it for Mount Gibson Iron:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.035 = AU$21m ÷ (AU$677m - AU$76m) (Based on the trailing twelve months to June 2023).
So, Mount Gibson Iron has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.1%.
See our latest analysis for Mount Gibson Iron
In the above chart we have measured Mount Gibson Iron's 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 Mount Gibson Iron here for free.
What Can We Tell From Mount Gibson Iron's ROCE Trend?
Things have been pretty stable at Mount Gibson Iron, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Mount Gibson Iron in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. With fewer investment opportunities, it makes sense that Mount Gibson Iron has been paying out a decent 46% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
In Conclusion...
In a nutshell, Mount Gibson Iron has been trudging along with the same returns from the same amount of capital over the last five years. And investors may be recognizing these trends since the stock has only returned a total of 6.6% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.