Here's What Maheshwari Logistics Limited's (NSE:MAHESHWARI) ROCE Can Tell Us

Today we'll evaluate Maheshwari Logistics Limited (NSE:MAHESHWARI) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

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

Or for Maheshwari Logistics:

0.22 = ₹456m ÷ (₹3.7b - ₹1.6b) (Based on the trailing twelve months to December 2019.)

Therefore, Maheshwari Logistics has an ROCE of 22%.

Check out our latest analysis for Maheshwari Logistics

Does Maheshwari Logistics Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, we find that Maheshwari Logistics's ROCE is meaningfully better than the 15% average in the Logistics industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Maheshwari Logistics sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

The image below shows how Maheshwari Logistics's ROCE compares to its industry, and you can click it to see more detail on its past growth.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Maheshwari Logistics is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Maheshwari Logistics's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Maheshwari Logistics has total assets of ₹3.7b and current liabilities of ₹1.6b. Therefore its current liabilities are equivalent to approximately 44% of its total assets. With this level of current liabilities, Maheshwari Logistics's ROCE is boosted somewhat.

Our Take On Maheshwari Logistics's ROCE

Maheshwari Logistics's ROCE does look good, but the level of current liabilities also contribute to that. Maheshwari Logistics looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

Maheshwari Logistics is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.

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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. Thank you for reading.