Today we’ll evaluate Mohini Health & Hygiene Limited (NSE:MHHL) to determine whether it could have potential as an investment idea. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Mohini Health & Hygiene:
0.12 = ₹110m ÷ (₹1.4b – ₹492m) (Based on the trailing twelve months to March 2018.)
Therefore, Mohini Health & Hygiene has an ROCE of 12%.
Does Mohini Health & Hygiene Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Mohini Health & Hygiene’s ROCE is meaningfully better than the 9.0% average in the Medical Equipment industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the industry comparison for now, Mohini Health & Hygiene’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
In our analysis, Mohini Health & Hygiene’s ROCE appears to be 12%, compared to 3 years ago, when its ROCE was 9.3%. This makes us think about whether the company has been reinvesting shrewdly.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. How cyclical is Mohini Health & Hygiene? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Mohini Health & Hygiene’s Current Liabilities And Their Impact On Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Mohini Health & Hygiene has total liabilities of ₹492m and total assets of ₹1.4b. As a result, its current liabilities are equal to approximately 36% of its total assets. Mohini Health & Hygiene has a medium level of current liabilities, which would boost its ROCE somewhat.
What We Can Learn From Mohini Health & Hygiene’s ROCE
Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. But note: Mohini Health & Hygiene may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.