There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Mindteck (India) (NSE:MINDTECK), 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 Mindteck (India):
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.089 = ₹132m ÷ (₹2.1b - ₹586m) (Based on the trailing twelve months to March 2021).
Thus, Mindteck (India) has an ROCE of 8.9%. On its own, that's a low figure but it's around the 11% average generated by the IT industry.
View 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'd like to look at how Mindteck (India) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Mindteck (India)'s ROCE Trend?
Over the past five years, Mindteck (India)'s ROCE has remained relatively flat while the business is using 24% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.
Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 28% of total assets, this reported ROCE would probably be less than8.9% because total capital employed would be higher.The 8.9% ROCE could be even lower if current liabilities weren't 28% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.
The Key Takeaway
It's a shame to see that Mindteck (India) is effectively shrinking in terms of its capital base. Although the market must be expecting these trends to improve because the stock has gained 83% over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you want to continue researching Mindteck (India), you might be interested to know about the 2 warning signs that our analysis has discovered.
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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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.
