Slowing Rates Of Return At MITCON Consultancy & Engineering Services (NSE:MITCON) Leave Little Room For Excitement

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating MITCON Consultancy & Engineering Services (NSE:MITCON), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on MITCON Consultancy & Engineering Services is:

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

0.036 = ₹61m ÷ (₹2.1b - ₹437m) (Based on the trailing twelve months to September 2021).

So, MITCON Consultancy & Engineering Services has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 13%.

View our latest analysis for MITCON Consultancy & Engineering Services

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

The Trend Of ROCE

The returns on capital haven't changed much for MITCON Consultancy & Engineering Services in recent years. Over the past five years, ROCE has remained relatively flat at around 3.6% and the business has deployed 86% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 20% of total assets, this reported ROCE would probably be less than3.6% because total capital employed would be higher.The 3.6% ROCE could be even lower if current liabilities weren't 20% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

The Bottom Line On MITCON Consultancy & Engineering Services' ROCE

In conclusion, MITCON Consultancy & Engineering Services has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 122% gain to shareholders who have held over the last three years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

MITCON Consultancy & Engineering Services does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those can't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.