Capital Allocation Trends At Max Ventures and Industries (NSE:MAXVIL) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. In light of that, when we looked at Max Ventures and Industries (NSE:MAXVIL) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Max Ventures and Industries, this is the formula:

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

0.02 = ₹378m ÷ (₹19b - ₹528m) (Based on the trailing twelve months to December 2022).

Thus, Max Ventures and Industries has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 17%.

View our latest analysis for Max Ventures and Industries

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

SWOT Analysis for Max Ventures and Industries

How Are Returns Trending?

On the surface, the trend of ROCE at Max Ventures and Industries doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.0% from 3.2% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Max Ventures and Industries has done well to pay down its current liabilities to 2.7% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Max Ventures and Industries have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 155% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you're still interested in Max Ventures and Industries it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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.