Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Minda (NSE:MINDACORP) and its ROCE trend, we weren’t exactly thrilled.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Minda:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.095 = ₹1.2b ÷ (₹23b – ₹10b) (Based on the trailing twelve months to March 2021).
Thus, Minda has an ROCE of 9.5%. Even though it’s in line with the industry average of 9.5%, it’s still a low return by itself.
In the above chart we have measured Minda’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Minda’s ROCE Trending?
The trend of ROCE doesn’t look fantastic because it’s fallen from 20% five years ago, while the business’s capital employed increased by 61%. However, some of the increase in capital employed could be attributed to the recent capital raising that’s been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Minda probably hasn’t received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Additionally, we found that Minda’s most recent EBIT figure is around the same as the prior year, so we’d attribute the drop in ROCE mostly to the capital raise.
On a side note, Minda has done well to pay down its current liabilities to 44% of total assets. So we could link some of this to the decrease in ROCE. What’s more, this can reduce some aspects of risk to the business because now the company’s suppliers or short-term creditors are funding less of its operations. 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. Either way, they’re still at a pretty high level, so we’d like to see them fall further if possible.
What We Can Learn From Minda’s ROCE
In summary, we’re somewhat concerned by Minda’s diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 23% in the last five years. Either way, we aren’t huge fans of the current trends and so with that we think you might find better investments elsewhere.
One more thing to note, we’ve identified 3 warning signs with Minda and understanding them should be part of your investment process.
While Minda may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
When trading Minda or any other investment, use the platform considered by many to be the Professional’s Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.