The Returns On Capital At Motorcar Parts of America (NASDAQ:MPAA) Don't Inspire Confidence
What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after briefly looking over the numbers, we don't think Motorcar Parts of America (NASDAQ:MPAA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)
0.064 = US$41m ÷ (US$1.1b - US$425m) (Based on the trailing twelve months to September 2023).
So, Motorcar Parts of America has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 13%.
See 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 report on analyst forecasts for the company.
How Are Returns Trending?
The trend of ROCE doesn't look fantastic because it's fallen from 11% five years ago, while the business's capital employed increased by 75%. That being said, Motorcar Parts of America raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Motorcar Parts of America might not have received a full period of earnings contribution from it.
The Bottom Line
Bringing it all together, while we're somewhat encouraged by Motorcar Parts of America's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 43% in the last five years. Therefore based on the analysis done in this article, we don't think Motorcar Parts of America has the makings of a multi-bagger.
On a separate note, we've found 1 warning sign for Motorcar Parts of America you'll probably want to know about.
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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
