Motorcar Parts of America's (NASDAQ:MPAA) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Motorcar Parts of America (NASDAQ:MPAA), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for Motorcar Parts of America:

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

0.064 = US$41m ÷ (US$1.1b - US$425m) (Based on the trailing twelve months to September 2023).

Therefore, Motorcar Parts of America has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 13%.

View our latest analysis for Motorcar Parts of America

Above you can see how the current ROCE for Motorcar Parts of America compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Motorcar Parts of America's ROCE Trending?

We weren't thrilled with the trend because Motorcar Parts of America's ROCE has reduced by 41% over the last five years, while the business employed 75% more capital. That being said, Motorcar Parts of America raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Motorcar Parts of America 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.

The Bottom Line On Motorcar Parts of America's ROCE

In summary, Motorcar Parts of America is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 48% in the last five years. Therefore based on the analysis done in this article, we don't think Motorcar Parts of America has the makings of a multi-bagger.

If you want to continue researching Motorcar Parts of America, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Motorcar Parts of America 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.