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What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Soup Holdings (SGX:5KI), so let's see why.
Return On Capital Employed (ROCE): What Is It?
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 Soup Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = S$535k ÷ (S$28m - S$11m) (Based on the trailing twelve months to June 2024).
So, Soup Holdings has an ROCE of 3.1%. On its own, that's a low figure but it's around the 3.7% average generated by the Hospitality industry.
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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Soup Holdings.
What The Trend Of ROCE Can Tell Us
There is reason to be cautious about Soup Holdings, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 12% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Soup Holdings becoming one if things continue as they have.
The Bottom Line
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 48% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing: We've identified 5 warning signs with Soup Holdings (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.