If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. 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. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Maheshwari Logistics (NSE:MAHESHWARI), it didn’t seem to tick all of these boxes.
What is Return On Capital Employed (ROCE)?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Maheshwari Logistics is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.13 = ₹288m ÷ (₹3.7b – ₹1.5b) (Based on the trailing twelve months to June 2020).
So, Maheshwari Logistics has an ROCE of 13%. That’s a relatively normal return on capital, and it’s around the 12% generated by the Logistics industry.
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 Maheshwari Logistics has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of Maheshwari Logistics’ historical ROCE movements, the trend isn’t fantastic. Around five years ago the returns on capital were 29%, but since then they’ve fallen to 13%. And considering revenue has dropped while employing more capital, we’d be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it’s actually producing a lower return – “less bang for their buck” per se.
On a related note, Maheshwari Logistics has decreased its current liabilities to 42% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it’s own money, you could argue this has made the business less efficient at generating ROCE. Either way, they’re still at a pretty high level, so we’d like to see them fall further if possible.
What We Can Learn From Maheshwari Logistics’ ROCE
We’re a bit apprehensive about Maheshwari Logistics because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 69% return to shareholders over the last three years, so investors might be expecting the trends to turn around. Regardless, we don’t feel to comfortable with the fundamentals so we’d be steering clear of this stock for now.
Maheshwari Logistics does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is a bit unpleasant…
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. 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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