What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount 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. Having said that, from a first glance at Mohit Industries (NSE:MOHITIND) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.
Understanding 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. To calculate this metric for Mohit Industries, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.015 = ₹23m ÷ (₹2.0b – ₹428m) (Based on the trailing twelve months to March 2022).
So, Mohit Industries has an ROCE of 1.5%. Ultimately, that’s a low return and it under-performs the Luxury industry average of 13%.
See our latest analysis for Mohit Industries
Historical performance is a great place to start when researching a stock so above you can see the gauge for Mohit Industries’ ROCE against it’s prior returns. If you’d like to look at how Mohit Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Mohit Industries doesn’t inspire confidence. To be more specific, ROCE has fallen from 11% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, Mohit Industries has done well to pay down its current liabilities to 22% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it’s own money, you could argue this has made the business less efficient at generating ROCE.
The Bottom Line On Mohit Industries’ ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Mohit Industries. And there could be an opportunity here if other metrics look good too, because the stock has declined 67% in the last five years. As a result, we’d recommend researching this stock further to uncover what other fundamentals of the business can show us.
Mohit Industries does have some risks, we noticed 3 warning signs (and 2 which are concerning) we think you should know about.
While Mohit Industries 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.