Capital Allocation Trends At MIND C.T.I (NASDAQ:MNDO) Aren't Ideal
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at MIND C.T.I (NASDAQ:MNDO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. Analysts use this formula to calculate it for MIND C.T.I:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$4.8m ÷ (US$30m - US$5.0m) (Based on the trailing twelve months to September 2023).
So, MIND C.T.I has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 7.7% generated by the Software industry.
View our latest analysis for MIND C.T.I
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 MIND C.T.I's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From MIND C.T.I's ROCE Trend?
When we looked at the ROCE trend at MIND C.T.I, we didn't gain much confidence. To be more specific, ROCE has fallen from 24% over the last five years. However it looks like MIND C.T.I might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
What We Can Learn From MIND C.T.I's ROCE
To conclude, we've found that MIND C.T.I is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 38% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
If you'd like to know more about MIND C.T.I, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.
While MIND C.T.I 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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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.
