Yahoo Finance Capital Allocation Trends At Magellan Aerospace (TSE:MAL) Aren't Ideal
To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Magellan Aerospace (TSE:MAL), so let's see why.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Magellan Aerospace, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = CA$35m ÷ (CA$1.0b - CA$204m) (Based on the trailing twelve months to March 2024).
So, Magellan Aerospace has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 9.3%.
Check out our latest analysis for Magellan Aerospace
Above you can see how the current ROCE for Magellan Aerospace compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Magellan Aerospace for free.
What The Trend Of ROCE Can Tell Us
We are a bit worried about the trend of returns on capital at Magellan Aerospace. To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Magellan Aerospace becoming one if things continue as they have.
What We Can Learn From Magellan Aerospace's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 40% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
While Magellan Aerospace doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for MAL on our platform.
While Magellan Aerospace isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by 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 to be financial advice. 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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