Returns On Capital Signal Tricky Times Ahead For MotoMotion China (SZSE:301061)

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 MotoMotion China (SZSE:301061) and its ROCE trend, we weren't exactly thrilled.

What Is 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. The formula for this calculation on MotoMotion China is:

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

0.13 = CN¥429m ÷ (CN¥3.7b - CN¥528m) (Based on the trailing twelve months to March 2024).

So, MotoMotion China has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Consumer Durables industry.

Check out our latest analysis for MotoMotion China

In the above chart we have measured MotoMotion China's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for MotoMotion China .

So How Is MotoMotion China's ROCE Trending?

On the surface, the trend of ROCE at MotoMotion China doesn't inspire confidence. Over the last five years, returns on capital have decreased to 13% from 24% 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 related note, MotoMotion China has decreased its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On MotoMotion China's ROCE

While returns have fallen for MotoMotion China in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 62% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

Like most companies, MotoMotion China does come with some risks, and we've found 1 warning sign that you should be aware of.

While MotoMotion China isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.