MIND C.T.I (NASDAQ:MNDO) Could Be At Risk Of Shrinking As A Company

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at MIND C.T.I (NASDAQ:MNDO), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for MIND C.T.I, this is the formula:

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

0.20 = US$5.5m ÷ (US$32m - US$5.6m) (Based on the trailing twelve months to December 2020).

Therefore, MIND C.T.I has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Software industry average of 11%.

View our latest analysis for MIND C.T.I

Historical performance is a great place to start when researching a stock so above you can see the gauge for MIND C.T.I's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of MIND C.T.I, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about MIND C.T.I, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 27% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect MIND C.T.I to turn into a multi-bagger.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Since the stock has skyrocketed 161% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Like most companies, MIND C.T.I does come with some risks, and we've found 2 warning signs that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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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