Yahoo Finance Standard Motor Products (NYSE:SMP) Has More To Do To Multiply In Value Going Forward
What trends should we look for it we want to identify stocks that can 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Standard Motor Products' (NYSE:SMP) trend of ROCE, we liked what we saw.
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 Standard Motor Products:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$141m ÷ (US$1.3b - US$304m) (Based on the trailing twelve months to December 2023).
Thus, Standard Motor Products has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 11% it's much better.
View our latest analysis for Standard Motor Products
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're interested, you can view the analysts predictions in our free analyst report for Standard Motor Products .
What Does the ROCE Trend For Standard Motor Products Tell Us?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 86% more capital in the last five years, and the returns on that capital have remained stable at 14%. 14% is a pretty standard return, and it provides some comfort knowing that Standard Motor Products has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a side note, Standard Motor Products has done well to reduce current liabilities to 24% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.
The Bottom Line
The main thing to remember is that Standard Motor Products has proven its ability to continually reinvest at respectable rates of return. Yet over the last five years the stock has declined 32%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
One more thing, we've spotted 1 warning sign facing Standard Motor Products that you might find interesting.
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.
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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.
