Should You Be Impressed By Motrex's (KOSDAQ:118990) Returns on Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Motrex (KOSDAQ:118990) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. The formula for this calculation on Motrex is:

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%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 4.1%.

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.

How Are Returns Trending?

We weren't thrilled with the trend because Motrex's ROCE has reduced by 95% over the last five years, while the business employed 516% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Motrex might not have received a full period of earnings contribution from it.

On a related note, Motrex has decreased its current liabilities to 29% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 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. In light of this, the stock has only gained 14% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you'd like to know more about Motrex, we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.

While Motrex may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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