Be Wary Of Mukand (NSE:MUKANDLTD) And Its Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Mukand (NSE:MUKANDLTD), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Mukand is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.034 = ₹880m ÷ (₹44b - ₹19b) (Based on the trailing twelve months to December 2019).

So, Mukand has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 13%.

See our latest analysis for Mukand

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mukand's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Mukand, check out these free graphs here.

So How Is Mukand's ROCE Trending?

We aren't too thrilled by the trend because ROCE has declined 56% over the last five years and despite the capital raising conducted before the latest reports, the business has -24% less capital employed.

On a side note, Mukand's current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Mukand's ROCE

To see Mukand reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven't taken kindly to these developments, since the stock has declined 35% from where it was five years ago. Unless these trends revert to a more positive trajectory, we would look elsewhere.

On a final note, we found 4 warning signs for Mukand (2 make us uncomfortable) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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