Be Wary Of Maheshwari Logistics (NSE:MAHESHWARI) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Maheshwari Logistics (NSE:MAHESHWARI) 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?

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

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

0.12 = ₹255m ÷ (₹3.5b - ₹1.4b) (Based on the trailing twelve months to September 2020).

So, Maheshwari Logistics has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.5% generated by the Logistics industry.

Check out our latest analysis for Maheshwari Logistics

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Maheshwari Logistics, we didn't gain much confidence. Around five years ago the returns on capital were 27%, but since then they've fallen to 12%. 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.

On a side note, Maheshwari Logistics has done well to pay down its current liabilities to 41% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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. Keep in mind 41% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Maheshwari Logistics' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Maheshwari Logistics have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 12% return to shareholders who held over the last three years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Maheshwari Logistics does have some risks, we noticed 4 warning signs (and 1 which is potentially serious) we think you should know about.

While Maheshwari 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.

If you decide to trade Maheshwari Logistics, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.