Has M M Forgings (NSE:MMFL) Got What It Takes To Become A Multi-Bagger?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at M M Forgings (NSE:MMFL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 M M Forgings is:

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

0.044 = ₹365m ÷ (₹11b - ₹2.8b) (Based on the trailing twelve months to December 2020).

Therefore, M M Forgings has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 9.4%.

Check out our latest analysis for M M Forgings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of M M Forgings, check out these free graphs here.

What Does the ROCE Trend For M M Forgings Tell Us?

In terms of M M Forgings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.4% from 20% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for M M Forgings have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these poor fundamentals, the stock has gained a huge 139% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about M M Forgings, we've spotted 5 warning signs, and 2 of them make us uncomfortable.

While M M Forgings 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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