Returns On Capital Signal Tricky Times Ahead For Mahindra Logistics (NSE:MAHLOG)

By
Simply Wall St
Published
September 06, 2021
NSEI:MAHLOG
Source: Shutterstock

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Mahindra Logistics (NSE:MAHLOG), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Mahindra Logistics is:

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

0.11 = ₹821m ÷ (₹17b - ₹9.1b) (Based on the trailing twelve months to June 2021).

Therefore, Mahindra Logistics has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 12% generated by the Logistics industry.

See our latest analysis for Mahindra Logistics

roce
NSEI:MAHLOG Return on Capital Employed September 7th 2021

Above you can see how the current ROCE for Mahindra Logistics compares to its prior returns on capital, but there's only so much you can tell from the past. 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?

When we looked at the ROCE trend at Mahindra Logistics, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 11% from 14% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Mahindra Logistics' current liabilities have increased over the last five years to 54% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 11%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line

While returns have fallen for Mahindra Logistics in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 25% over the last three years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you want to continue researching Mahindra Logistics, you might be interested to know about the 2 warning signs that our analysis has discovered.

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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