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Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Motorpoint Group (LON:MOTR), the trends above didn't look too great.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Motorpoint Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.017 = UK£1.5m ÷ (UK£198m - UK£111m) (Based on the trailing twelve months to March 2024).
Thus, Motorpoint Group has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 9.8%.
Check out our latest analysis for Motorpoint Group
Above you can see how the current ROCE for Motorpoint Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Motorpoint Group .
What Can We Tell From Motorpoint Group's ROCE Trend?
There is reason to be cautious about Motorpoint Group, given the returns are trending downwards. To be more specific, the ROCE was 35% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Motorpoint Group to turn into a multi-bagger.
On a separate but related note, it's important to know that Motorpoint Group has a current liabilities to total assets ratio of 56%, which we'd consider pretty high. 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.