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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Soup Holdings (SGX:5KI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Soup Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = S$2.3m ÷ (S$27m - S$10m) (Based on the trailing twelve months to December 2022).
Therefore, Soup Holdings has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 2.1% it's much better.
Check out our latest analysis for Soup Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Soup Holdings' ROCE against it's prior returns. If you'd like to look at how Soup Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Soup Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 14% from 17% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line On Soup Holdings' ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Soup Holdings. And there could be an opportunity here if other metrics look good too, because the stock has declined 49% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
On a final note, we found 4 warning signs for Soup Holdings (2 shouldn't be ignored) you should be aware of.