Yahoo Finance Under The Bonnet, Majestic Gold's (CVE:MJS) Returns Look Impressive
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. With that in mind, the ROCE of Majestic Gold (CVE:MJS) looks great, so lets see what the trend can tell us.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Majestic Gold is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = US$24m ÷ (US$128m - US$29m) (Based on the trailing twelve months to March 2021).
Thus, Majestic Gold has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 0.8%.
See our latest analysis for Majestic Gold
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Majestic Gold's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Majestic Gold's ROCE Trending?
The fact that Majestic Gold is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 24% on its capital. And unsurprisingly, like most companies trying to break into the black, Majestic Gold is utilizing 56% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 22%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
Our Take On Majestic Gold's ROCE
In summary, it's great to see that Majestic Gold has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 21% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you want to continue researching Majestic Gold, you might be interested to know about the 2 warning signs that our analysis has discovered.
Majestic Gold is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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