Mahindra & Mahindra (NSE:M&M) Hasn't Managed To Accelerate Its Returns

By
Simply Wall St
Published
April 17, 2022
NSEI:M&M
Source: Shutterstock

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Mahindra & Mahindra's (NSE:M&M) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Mahindra & Mahindra, this is the formula:

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

0.10 = ₹116b ÷ (₹1.7t - ₹528b) (Based on the trailing twelve months to December 2021).

Therefore, Mahindra & Mahindra has an ROCE of 10%. In absolute terms, that's a pretty standard return but compared to the Auto industry average it falls behind.

Check out our latest analysis for Mahindra & Mahindra

roce
NSEI:M&M Return on Capital Employed April 17th 2022

Above you can see how the current ROCE for Mahindra & Mahindra compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Mahindra & Mahindra here for free.

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has employed 63% more capital in the last five years, and the returns on that capital have remained stable at 10%. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

In Conclusion...

To sum it up, Mahindra & Mahindra has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Mahindra & Mahindra does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

While Mahindra & Mahindra isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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