Here's What's Concerning About Maral Overseas (NSE:MARALOVER)

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Maral Overseas (NSE:MARALOVER), we weren't too upbeat about how things were going.

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. The formula for this calculation on Maral Overseas is:

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

0.015 = ₹22m ÷ (₹4.0b - ₹2.6b) (Based on the trailing twelve months to December 2020).

Therefore, Maral Overseas has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 8.9%.

View our latest analysis for Maral Overseas

Historical performance is a great place to start when researching a stock so above you can see the gauge for Maral Overseas' ROCE against it's prior returns. If you'd like to look at how Maral Overseas 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?

The trend of returns that Maral Overseas is generating are raising some concerns. To be more specific, today's ROCE was 11% five years ago but has since fallen to 1.5%. In addition to that, Maral Overseas is now employing 32% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 65%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.5%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

In summary, it's unfortunate that Maral Overseas is shrinking its capital base and also generating lower returns. Despite the concerning underlying trends, the stock has actually gained 16% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing: We've identified 4 warning signs with Maral Overseas (at least 2 which shouldn't be ignored) , and understanding these would certainly be useful.

While Maral Overseas 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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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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