Here's What's Concerning About Mishra Dhatu Nigam's (NSE:MIDHANI) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Mishra Dhatu Nigam (NSE:MIDHANI) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Mishra Dhatu Nigam:

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

0.12 = ₹2.2b ÷ (₹27b - ₹7.7b) (Based on the trailing twelve months to December 2021).

So, Mishra Dhatu Nigam has an ROCE of 12%. In isolation, that's a pretty standard return but against the Metals and Mining industry average of 18%, it's not as good.

See our latest analysis for Mishra Dhatu Nigam

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mishra Dhatu Nigam's ROCE against it's prior returns. If you're interested in investigating Mishra Dhatu Nigam's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Mishra Dhatu Nigam, we didn't gain much confidence. To be more specific, ROCE has fallen from 19% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Mishra Dhatu Nigam's ROCE

While returns have fallen for Mishra Dhatu Nigam in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 43% to shareholders over the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Mishra Dhatu Nigam does have some risks though, and we've spotted 1 warning sign for Mishra Dhatu Nigam that you might be interested in.

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. 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.