How Has Mimi's Rock (CVE:MIMI) Allocated Its Capital?

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Mimi's Rock (CVE:MIMI), we weren't too upbeat about how things were going.

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. The formula for this calculation on Mimi's Rock is:

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).

Therefore, 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%.

Check out our latest analysis for Mimi's Rock

Above you can see how the current ROCE for Mimi's Rock compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Mimi's Rock.

What Does the ROCE Trend For Mimi's Rock Tell Us?

We are a bit anxious about the trends of ROCE at Mimi's Rock. The company used to generate 12% on its capital one year ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 21% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 45%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 9.3%. 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.

In Conclusion...

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. But investors must be expecting an improvement of sorts because over the last yearthe stock has delivered a respectable 76% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing, we've spotted 3 warning signs facing Mimi's Rock that you might find interesting.

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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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