Capital Allocation Trends At Mahindra Logistics (NSE:MAHLOG) Aren't Ideal

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Mahindra Logistics (NSE:MAHLOG), 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. To calculate this metric for Mahindra Logistics, this is the formula:

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

0.058 = ₹446m ÷ (₹17b - ₹9.1b) (Based on the trailing twelve months to March 2021).

Thus, Mahindra Logistics has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 9.5%.

See our latest analysis for Mahindra Logistics

In the above chart we have measured Mahindra Logistics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Mahindra Logistics here for free.

What Does the ROCE Trend For Mahindra Logistics Tell Us?

On the surface, the trend of ROCE at Mahindra Logistics doesn't inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 54%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 5.8%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Mahindra Logistics' ROCE

In summary, Mahindra Logistics is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last three years has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 3 warning signs with Mahindra Logistics and understanding them should be part of your investment process.

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. 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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