What trends should we look for if we want to identify stocks that can multiply in value over the long term? First, we want a growing yield capital employed (ROCE) and an ever-increasing base of the invested capital. Ultimately, this shows that it is a company that reinvests profits at an ever-increasing return. With that in mind, we’ve noticed some promising trends at Magical Software Enterprises (NASDAQ:MGIC) so let’s take a closer look.
Return on Invested Capital (ROCE): What is it?
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a company generates on the capital employed in its business. To calculate this metric for Magic Software Enterprises, here’s the formula:
Return on Capital Employed = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.15 = US$59 million ÷ (US$494 million – US$107 million) (Based on the last twelve months to June 2022).
So, Magic Software Enterprises has a ROCE of 15%. In absolute terms, that’s a satisfactory return, but compared to the software industry’s average of 10%, it’s much better.
Check out our latest analysis for Magic Software Enterprises
Above you can see how the current ROCE for Magic Software Enterprises compares to the past return on capital, but there is only so much that you can see from the past. If you’d like, you can check out the analysts’ forecasts for Magic Software Enterprises here for: free.
What does the ROCE trend for Magic Software Enterprises tell us?
The trends we’ve noticed at Magic Software Enterprises are quite reassuring. Over the past five years, the return on invested capital has increased significantly to 15%. In fact, the company is earning more per dollar of invested capital, and in addition, 32% more capital is now being deployed. So we’re very inspired by what we’re seeing at Magic Software Enterprises, thanks to its ability to profitably reinvest capital.
What we can learn from Magic Software Enterprises’ ROCE
A company that grows its return on capital and can consistently reinvest in itself is a highly sought after trait, and that’s what Magic Software Enterprises has. And a remarkable 159% total return over the past five years tells us that investors expect more good things in the future. That said, we still think the promising fundamentals mean the company deserves a little more due diligence.
However, Magic Software Enterprises has some risks, and we noted 1 warning sign for Magic Software Enterprises you may be interested in.
While Magic Software Enterprises doesn’t get the highest returns, you should check this out free list of companies that achieve high return on equity with solid balance sheets.
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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or your financial situation. We strive to provide you with long-term focused analysis powered by fundamental data. Please note that our analysis may not take into account the latest price sensitive company announcements or quality material. Simply Wall St has no position in said stocks.
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