Maheshwari Logistics (NSE:MAHESHWARI) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Maheshwari Logistics (NSE:MAHESHWARI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Maheshwari Logistics, this is the formula:

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

0.14 = ₹414m ÷ (₹5.3b - ₹2.4b) (Based on the trailing twelve months to December 2023).

Thus, Maheshwari Logistics has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 13% 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 Maheshwari Logistics' past earnings, revenue and cash flow.

What Can We Tell From Maheshwari Logistics' ROCE Trend?

On the surface, the trend of ROCE at Maheshwari Logistics doesn't inspire confidence. Over the last five years, returns on capital have decreased to 14% from 20% five years ago. However it looks like Maheshwari Logistics might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Maheshwari Logistics' current liabilities are still rather high at 45% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In summary, Maheshwari Logistics is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 37% in the last five years. Therefore based on the analysis done in this article, we don't think Maheshwari Logistics has the makings of a multi-bagger.

One more thing: We've identified 3 warning signs with Maheshwari Logistics (at least 2 which shouldn't be ignored) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.