Has Maheshwari Logistics (NSE:MAHESHWARI) Got What It Takes To Become A Multi-Bagger?

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 investigating Maheshwari Logistics (NSE:MAHESHWARI), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. Analysts use this formula to calculate it for Maheshwari Logistics:

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%. In absolute terms, that's a satisfactory return, but compared to the Logistics industry average of 9.6% it's much better.

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 Does the ROCE Trend For Maheshwari Logistics Tell Us?

On the surface, the trend of ROCE at Maheshwari Logistics doesn't inspire confidence. Around five years ago the returns on capital were 27%, but since then they've fallen to 12%. 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 related note, Maheshwari Logistics has decreased its current liabilities to 41% of total assets. So we could link some of this to the decrease in ROCE. 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

What We Can Learn From Maheshwari Logistics' ROCE

We're a bit apprehensive about Maheshwari Logistics because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 11% from where it was three years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Maheshwari Logistics, we've spotted 4 warning signs, and 1 of them is concerning.

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.

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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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