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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. In light of that, when we looked at Motorcar Parts of America (NASDAQ:MPAA) and its ROCE trend, we weren't exactly thrilled.
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 Motorcar Parts of America, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = US$50m ÷ (US$996m - US$390m) (Based on the trailing twelve months to December 2023).
Thus, Motorcar Parts of America has an ROCE of 8.2%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 12%.
View our latest analysis for Motorcar Parts of America
Above you can see how the current ROCE for Motorcar Parts of America compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Motorcar Parts of America .
The Trend Of ROCE
There are better returns on capital out there than what we're seeing at Motorcar Parts of America. Over the past five years, ROCE has remained relatively flat at around 8.2% and the business has deployed 71% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From Motorcar Parts of America's ROCE
As we've seen above, Motorcar Parts of America's returns on capital haven't increased but it is reinvesting in the business. Moreover, since the stock has crumbled 75% over the last five years, it appears investors are expecting the worst. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
Motorcar Parts of America does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.