Mahindra & Mahindra (NSE:M&M) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after briefly looking over the numbers, we don't think Mahindra & Mahindra (NSE:M&M) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Mahindra & Mahindra:

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

0.064 = ₹78b ÷ (₹1.8t - ₹576b) (Based on the trailing twelve months to December 2020).

Thus, Mahindra & Mahindra has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Auto industry average of 11%.

Check out our latest analysis for Mahindra & Mahindra

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 to see what analysts are forecasting going forward, you should check out our free report for Mahindra & Mahindra.

So How Is Mahindra & Mahindra's ROCE Trending?

In terms of Mahindra & Mahindra's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 13% over the last five years. 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.

What We Can Learn From Mahindra & Mahindra's ROCE

In summary, we're somewhat concerned by Mahindra & Mahindra's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 25% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to know some of the risks facing Mahindra & Mahindra we've found 3 warning signs (2 are potentially serious!) that you should be aware of before investing here.

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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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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