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The Returns On Capital At Standard Motor Products (NYSE:SMP) Don't Inspire Confidence

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Standard Motor Products (NYSE:SMP) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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 Standard Motor Products:

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

0.15 = US$135m ÷ (US$1.3b - US$410m) (Based on the trailing twelve months to June 2022).

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So, Standard Motor Products has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 10.0% generated by the Auto Components industry.

See our latest analysis for Standard Motor Products

roce
roce

In the above chart we have measured Standard Motor Products' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Standard Motor Products.

So How Is Standard Motor Products' ROCE Trending?

In terms of Standard Motor Products' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 25% over the last five years. However it looks like Standard Motor Products might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Standard Motor Products is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 19% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Standard Motor Products has the makings of a multi-bagger.

Standard Motor Products does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those don't sit too well with us...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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