The Returns At CENTRAL MOTEKLtd (KRX:308170) Provide Us With Signs Of What's To Come

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 investigating CENTRAL MOTEKLtd (KRX:308170), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for CENTRAL MOTEKLtd:

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

0.035 = ₩5.1b ÷ (₩248b - ₩102b) (Based on the trailing twelve months to September 2020).

Thus, CENTRAL MOTEKLtd has an ROCE of 3.5%. On its own, that's a low figure but it's around the 4.1% average generated by the Auto Components industry.

Check out our latest analysis for CENTRAL MOTEKLtd

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

The Trend Of ROCE

Things have been pretty stable at CENTRAL MOTEKLtd, with its capital employed and returns on that capital staying somewhat the same for the last . It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect CENTRAL MOTEKLtd to be a multi-bagger going forward.

On a side note, CENTRAL MOTEKLtd's current liabilities are still rather high at 41% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On CENTRAL MOTEKLtd's ROCE

We can conclude that in regards to CENTRAL MOTEKLtd's returns on capital employed and the trends, there isn't much change to report on. Although the market must be expecting these trends to improve because the stock has gained 38% over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One final note, you should learn about the 3 warning signs we've spotted with CENTRAL MOTEKLtd (including 1 which is can't be ignored) .

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. 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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