In This Article:
Today we'll evaluate Mahindra Logistics Limited (NSE:MAHLOG) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
So, How Do We Calculate ROCE?
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 Mahindra Logistics:
0.23 = ₹1.2b ÷ (₹12b - ₹6.8b) (Based on the trailing twelve months to June 2019.)
Therefore, Mahindra Logistics has an ROCE of 23%.
See our latest analysis for Mahindra Logistics
Is Mahindra Logistics's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Mahindra Logistics's ROCE is meaningfully better than the 16% average in the Logistics industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Mahindra Logistics compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Our data shows that Mahindra Logistics currently has an ROCE of 23%, compared to its ROCE of 14% 3 years ago. This makes us wonder if the company is improving. The image below shows how Mahindra 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Mahindra Logistics.