Mahindra & Mahindra (NSE:M&M) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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.

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 Mahindra & Mahindra, this is the formula:

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

0.095 = ₹108b ÷ (₹1.7t - ₹528b) (Based on the trailing twelve months to September 2021).

Thus, Mahindra & Mahindra has an ROCE of 9.5%. Ultimately, that's a low return and it under-performs the Auto industry average of 14%.

View 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.

What Can We Tell From Mahindra & Mahindra's ROCE Trend?

In terms of Mahindra & Mahindra's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.5% from 12% five years ago. However it looks like Mahindra & Mahindra 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 Mahindra & Mahindra's ROCE

Bringing it all together, while we're somewhat encouraged by Mahindra & Mahindra's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 44% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Mahindra & Mahindra does have some risks, we noticed 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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. 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.