When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Mindteck (India) (NSE:MINDTECK), we weren't too upbeat about how things were going.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Mindteck (India), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = ₹18m ÷ (₹2.0b - ₹594m) (Based on the trailing twelve months to September 2020).
So, Mindteck (India) has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the IT industry average of 11%.
See our latest analysis for Mindteck (India)
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 Mindteck (India), check out these free graphs here.
What The Trend Of ROCE Can Tell Us
We are a bit anxious about the trends of ROCE at Mindteck (India). To be more specific, today's ROCE was 14% five years ago but has since fallen to 1.2%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 23% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.
On a side note, Mindteck (India)'s current liabilities have increased over the last five years to 29% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.2%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.What We Can Learn From Mindteck (India)'s ROCE
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. It should come as no surprise then that the stock has fallen 34% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
Mindteck (India) does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. 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.
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About NSEI:MINDTECK
Mindteck (India)
Provides engineering and information technology (IT) services in the United States, India, and internationally.
Flawless balance sheet second-rate dividend payer.
