We Like momo.com's (TWSE:8454) Returns And Here's How They're Trending

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at momo.com's (TWSE:8454) look very promising so lets take a look.

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 momo.com, this is the formula:

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

0.38 = NT$4.3b ÷ (NT$30b - NT$18b) (Based on the trailing twelve months to June 2024).

Thus, momo.com has an ROCE of 38%. That's a fantastic return and not only that, it outpaces the average of 6.3% earned by companies in a similar industry.

See our latest analysis for momo.com

In the above chart we have measured momo.com's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for momo.com .

So How Is momo.com's ROCE Trending?

momo.com is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 38%. Basically the business is earning more per dollar of capital invested and in addition to that, 77% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 61% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line On momo.com's ROCE

In summary, it's great to see that momo.com can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 181% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if momo.com can keep these trends up, it could have a bright future ahead.

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

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.