MIRC Electronics' (NSE:MIRCELECTR) Returns On Capital Not Reflecting Well On The Business

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at MIRC Electronics (NSE:MIRCELECTR) and its ROCE trend, we weren't exactly thrilled.

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

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. Analysts use this formula to calculate it for MIRC Electronics:

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

0.026 = ₹58m ÷ (₹7.0b - ₹4.8b) (Based on the trailing twelve months to March 2022).

Therefore, MIRC Electronics has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 13%.

View our latest analysis for MIRC Electronics

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at MIRC Electronics, we didn't gain much confidence. To be more specific, ROCE has fallen from 18% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a separate but related note, it's important to know that MIRC Electronics has a current liabilities to total assets ratio of 68%, which we'd consider pretty high. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for MIRC Electronics. And there could be an opportunity here if other metrics look good too, because the stock has declined 16% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

MIRC Electronics does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While MIRC Electronics may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.