Stock Analysis

Be Wary Of Mohini Health & Hygiene (NSE:MHHL) And Its Returns On Capital

NSEI:MHHL
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When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Mohini Health & Hygiene (NSE:MHHL), we've spotted some signs that it could be struggling, so let's investigate.

Understanding 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. To calculate this metric for Mohini Health & Hygiene, this is the formula:

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

0.091 = ₹81m ÷ (₹1.3b - ₹451m) (Based on the trailing twelve months to March 2020).

Thus, Mohini Health & Hygiene has an ROCE of 9.1%. Even though it's in line with the industry average of 9.1%, it's still a low return by itself.

Check out our latest analysis for Mohini Health & Hygiene

roce
NSEI:MHHL Return on Capital Employed August 6th 2021

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Mohini Health & Hygiene's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Mohini Health & Hygiene's ROCE Trend?

There is reason to be cautious about Mohini Health & Hygiene, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 13% that they were earning two years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last two years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Mohini Health & Hygiene becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Mohini Health & Hygiene is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last three years have experienced a 46% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Mohini Health & Hygiene (of which 4 can't be ignored!) that you should know about.

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. 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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