Kaushalya Logistics (NSE:KLL) Will Want To Turn Around Its Return Trends

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Kaushalya Logistics (NSE:KLL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Kaushalya Logistics, this is the formula:

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

0.089 = ₹88m ÷ (₹2.7b - ₹1.7b) (Based on the trailing twelve months to September 2024).

So, Kaushalya Logistics has an ROCE of 8.9%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 14%.

See our latest analysis for Kaushalya Logistics

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

So How Is Kaushalya Logistics' ROCE Trending?

When we looked at the ROCE trend at Kaushalya Logistics, we didn't gain much confidence. Around four years ago the returns on capital were 20%, but since then they've fallen to 8.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Kaushalya Logistics' current liabilities have increased over the last four years to 64% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 8.9%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line

In summary, Kaushalya Logistics is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last year, the stock has given away 23% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing: We've identified 3 warning signs with Kaushalya Logistics (at least 1 which is potentially serious) , and understanding them would certainly be useful.

While Kaushalya Logistics may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.