Capital Allocation Trends At Mohini Health & Hygiene (NSE:MHHL) Aren't Ideal

Did you know there are some financial metrics that can provide clues of a potential 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Mohini Health & Hygiene (NSE:MHHL), it didn't seem to tick all of these boxes.

What Is 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. 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)

0.089 = ₹99m ÷ (₹1.4b - ₹287m) (Based on the trailing twelve months to March 2024).

So, Mohini Health & Hygiene has an ROCE of 8.9%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 18%.

Check out our latest analysis for Mohini Health & Hygiene

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mohini Health & Hygiene's ROCE against it's prior returns. If you'd like to look at how Mohini Health & Hygiene has performed in the past in other metrics, you can view this free graph of Mohini Health & Hygiene's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Mohini Health & Hygiene's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 16%, but since then they've fallen to 8.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Mohini Health & Hygiene has done well to pay down its current liabilities to 21% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Mohini Health & Hygiene's ROCE

To conclude, we've found that Mohini Health & Hygiene is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 292% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 2 warning signs with Mohini Health & Hygiene and understanding them should be part of your investment process.

While Mohini Health & Hygiene isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.