Capital Allocation Trends At MIC Electronics (NSE:MICEL) Aren't Ideal

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 MIC Electronics (NSE:MICEL) and its ROCE trend, we weren't exactly thrilled.

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Return On Capital Employed (ROCE): What Is It?

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 MIC Electronics:

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

0.06 = ₹137m ÷ (₹2.8b - ₹558m) (Based on the trailing twelve months to December 2024).

Therefore, MIC Electronics has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 21%.

See our latest analysis for MIC Electronics

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're interested in investigating MIC Electronics' past further, check out this free graph covering MIC Electronics' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because MIC Electronics' ROCE has reduced by 42% over the last three years, while the business employed 351% more capital. Usually this isn't ideal, but given MIC Electronics conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. MIC Electronics probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line On MIC Electronics' 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 MIC Electronics. And long term investors must be optimistic going forward because the stock has returned a huge 9,283% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you're still interested in MIC Electronics it's worth checking out our FREE intrinsic value approximation for MICEL to see if it's trading at an attractive price in other respects.

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.