Will Core Molding Technologies (NYSEMKT:CMT) Multiply In Value Going Forward?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at Core Molding Technologies (NYSEMKT:CMT) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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 Core Molding Technologies is:

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

0.013 = US$1.8m ÷ (US$174m - US$37m) (Based on the trailing twelve months to September 2020).

Therefore, Core Molding Technologies has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 7.5%.

Check out our latest analysis for Core Molding Technologies

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Core Molding Technologies has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Core Molding Technologies' ROCE Trend?

When we looked at the ROCE trend at Core Molding Technologies, we didn't gain much confidence. To be more specific, ROCE has fallen from 18% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

In summary, we're somewhat concerned by Core Molding Technologies' diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 26% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to know some of the risks facing Core Molding Technologies we've found 3 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While Core Molding Technologies 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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