These Return Metrics Don't Make Mimi's Rock (CVE:MIMI) Look Too Strong

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Mimi's Rock (CVE:MIMI), so let's see why.

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

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

0.057 = CA$1.2m ÷ (CA$40m - CA$18m) (Based on the trailing twelve months to June 2022).

Therefore, Mimi's Rock has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 17%.

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'd like to see what analysts are forecasting going forward, you should check out our free report for Mimi's Rock.

So How Is Mimi's Rock's ROCE Trending?

We aren't too thrilled by the trend because ROCE has declined 44% over the last three years and despite the capital raising conducted before the latest reports, the business has -34% less capital employed.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 45%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From Mimi's Rock's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. This could explain why the stock has sunk a total of 77% in the last three years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Mimi's Rock does have some risks though, and we've spotted 3 warning signs for Mimi's Rock that you might be interested in.

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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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.