If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. And from a first read, things don't look too good at Mimi's Rock (CVE:MIMI), so let's see why.
Return On Capital Employed (ROCE): What is it?
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 Mimi's Rock:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.093 = CA$2.4m ÷ (CA$46m - CA$21m) (Based on the trailing twelve months to September 2020).
Thus, Mimi's Rock has an ROCE of 9.3%. In absolute terms, that's a low return, but it's much better than the Personal Products industry average of 6.2%.
View our latest analysis for Mimi's Rock
In the above chart we have measured Mimi's Rock'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 Mimi's Rock's ROCE Trending?
The trend of returns that Mimi's Rock is generating are raising some concerns. The company used to generate 12% on its capital one year ago but it has since fallen noticeably. On top of that, the business is utilizing 21% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
On a side note, Mimi's Rock's current liabilities have increased over the last one year to 45% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.
The Bottom Line
To see Mimi's Rock reducing the capital employed in the business in tandem with diminishing returns, is concerning. But investors must be expecting an improvement of sorts because over the last yearthe stock has delivered a respectable 60% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
If you'd like to know about the risks facing Mimi's Rock, we've discovered 3 warning signs that you should be aware of.
While Mimi's Rock 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. 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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About TSXV:MIMI
Mimi's Rock
Mimi’s Rock Corp. operates as an online dietary supplement and wellness company that markets and sells its products under the Dr.
Good value with imperfect balance sheet.
