Is Maharashtra Scooters (NSE:MAHSCOOTER) A Future Multi-bagger?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. So on that note, Maharashtra Scooters (NSE:MAHSCOOTER) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Maharashtra Scooters is:

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

0.011 = ₹1.2b ÷ (₹115b - ₹128m) (Based on the trailing twelve months to September 2020).

Thus, Maharashtra Scooters has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Auto industry average of 10%.

See our latest analysis for Maharashtra Scooters

Historical performance is a great place to start when researching a stock so above you can see the gauge for Maharashtra Scooters' ROCE against it's prior returns. If you'd like to look at how Maharashtra Scooters has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Maharashtra Scooters' ROCE Trending?

The fact that Maharashtra Scooters is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 1.1% which is a sight for sore eyes. Not only that, but the company is utilizing 3,489% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In Conclusion...

Overall, Maharashtra Scooters gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 1 warning sign with Maharashtra Scooters and understanding this should be part of your investment process.

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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