Motrex (KOSDAQ:118990) Will Be Hoping To Turn Its Returns On Capital Around

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Motrex (KOSDAQ:118990) 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 Motrex, this is the formula:

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

0.0093 = ₩2.8b ÷ (₩419b - ₩121b) (Based on the trailing twelve months to September 2020).

So, Motrex has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 4.4%.

View our latest analysis for Motrex

Historical performance is a great place to start when researching a stock so above you can see the gauge for Motrex's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Motrex, check out these free graphs here.

So How Is Motrex's ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 18% five years ago, while the business's capital employed increased by 516%. That being said, Motrex raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Motrex probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Motrex has decreased its current liabilities to 29% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Motrex's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Motrex is reinvesting for growth and has higher sales as a result. However, total returns to shareholders over the last three years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Motrex does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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