Here's What To Make Of Mishra Dhatu Nigam's (NSE:MIDHANI) Returns On Capital

There are a few key trends to look for if we want to identify the next 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Mishra Dhatu Nigam (NSE:MIDHANI), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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 Mishra Dhatu Nigam, this is the formula:

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

0.079 = ₹1.4b ÷ (₹24b - ₹6.8b) (Based on the trailing twelve months to September 2020).

So, Mishra Dhatu Nigam has an ROCE of 7.9%. In absolute terms, that's a low return but it's around the Metals and Mining industry average of 9.6%.

Check out our latest analysis for Mishra Dhatu Nigam

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 want to delve into the historical earnings, revenue and cash flow of Mishra Dhatu Nigam, check out these free graphs here.

What Can We Tell From Mishra Dhatu Nigam's ROCE Trend?

On the surface, the trend of ROCE at Mishra Dhatu Nigam doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 7.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Mishra Dhatu Nigam have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 21% return over the last year, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Mishra Dhatu Nigam does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think 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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