Slowing Rates Of Return At Mukta Arts (NSE:MUKTAARTS) Leave Little Room For Excitement

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Mukta Arts (NSE:MUKTAARTS) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for Mukta Arts, this is the formula:

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

0.028 = ₹29m ÷ (₹2.4b - ₹1.4b) (Based on the trailing twelve months to March 2021).

So, Mukta Arts has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 7.9%.

See our latest analysis for Mukta Arts

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'd like to look at how Mukta Arts has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at Mukta Arts, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Mukta Arts doesn't end up being a multi-bagger in a few years time.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 58% of total assets, this reported ROCE would probably be less than2.8% because total capital employed would be higher.The 2.8% ROCE could be even lower if current liabilities weren't 58% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

The Bottom Line

In a nutshell, Mukta Arts has been trudging along with the same returns from the same amount of capital over the last five years. And investors appear hesitant that the trends will pick up because the stock has fallen 39% in the last five years. Therefore based on the analysis done in this article, we don't think Mukta Arts has the makings of a multi-bagger.

If you'd like to know more about Mukta Arts, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

While Mukta Arts may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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