There Are Reasons To Feel Uneasy About M.V.K. Agro Food Product's (NSE:MVKAGRO) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at M.V.K. Agro Food Product (NSE:MVKAGRO), it didn't seem to tick all of these boxes.

Our free stock report includes 4 warning signs investors should be aware of before investing in M.V.K. Agro Food Product. Read for free now.

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. Analysts use this formula to calculate it for M.V.K. Agro Food Product:

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

0.12 = ₹177m ÷ (₹2.7b - ₹1.3b) (Based on the trailing twelve months to September 2024).

Thus, M.V.K. Agro Food Product has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 13% generated by the Food industry.

See our latest analysis for M.V.K. Agro Food Product

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

How Are Returns Trending?

In terms of M.V.K. Agro Food Product's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last three 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 related note, M.V.K. Agro Food Product has decreased its current liabilities to 47% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that M.V.K. Agro Food Product is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 26% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you want to know some of the risks facing M.V.K. Agro Food Product we've found 4 warning signs (2 are significant!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.