Mishra Dhatu Nigam (NSE:MIDHANI) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Mishra Dhatu Nigam (NSE:MIDHANI), it didn't seem to tick all of these boxes.

What is 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 Mishra Dhatu Nigam is:

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

0.096 = ₹1.7b ÷ (₹24b - ₹6.8b) (Based on the trailing twelve months to December 2020).

So, Mishra Dhatu Nigam has an ROCE of 9.6%. Even though it's in line with the industry average of 9.6%, it's still a low return by itself.

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 Does the ROCE Trend For Mishra Dhatu Nigam Tell Us?

On the surface, the trend of ROCE at Mishra Dhatu Nigam doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.6% from 17% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

The Bottom Line On Mishra Dhatu Nigam's ROCE

In summary, we're somewhat concerned by Mishra Dhatu Nigam's diminishing returns on increasing amounts of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 42% return over the last three years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 1 warning sign for Mishra Dhatu Nigam you'll probably want to know about.

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