Stock Analysis

Mohini Health & Hygiene's (NSE:MHHL) Returns On Capital Not Reflecting Well On The Business

NSEI:MHHL
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To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Mohini Health & Hygiene (NSE:MHHL) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Mohini Health & Hygiene is:

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).

So, Mohini Health & Hygiene has an ROCE of 9.1%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 11%.

View our latest analysis for Mohini Health & Hygiene

roce
NSEI:MHHL Return on Capital Employed April 2nd 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'd like to look at how Mohini Health & Hygiene has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Mohini Health & Hygiene's ROCE Trending?

In terms of Mohini Health & Hygiene's historical ROCE movements, the trend doesn't inspire confidence. 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Mohini Health & Hygiene to turn into a multi-bagger.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 65% over the last three years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Mohini Health & Hygiene does have some risks, we noticed 5 warning signs (and 3 which are a bit unpleasant) we think you should know about.

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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