Capital Allocation Trends At MMP Industries (NSE:MMP) Aren't Ideal

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at MMP Industries (NSE:MMP), 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. Analysts use this formula to calculate it for MMP Industries:

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

0.13 = ₹293m ÷ (₹3.1b - ₹767m) (Based on the trailing twelve months to September 2021).

Therefore, MMP Industries has an ROCE of 13%. In absolute terms, that's a pretty standard return but compared to the Metals and Mining industry average it falls behind.

View our latest analysis for MMP Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for MMP Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of MMP Industries, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at MMP Industries, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 33% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, MMP Industries has decreased its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On MMP Industries' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for MMP Industries. Furthermore the stock has climbed 26% over the last three years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

MMP Industries does have some risks, we noticed 4 warning signs (and 2 which shouldn't be ignored) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.