ArcSoft's (SHSE:688088) Returns On Capital Not Reflecting Well On The Business

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 ArcSoft (SHSE:688088) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on ArcSoft is:

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

0.039 = CN¥107m ÷ (CN¥3.0b - CN¥319m) (Based on the trailing twelve months to March 2024).

Therefore, ArcSoft has an ROCE of 3.9%. On its own that's a low return, but compared to the average of 3.0% generated by the Software industry, it's much better.

See our latest analysis for ArcSoft

Above you can see how the current ROCE for ArcSoft compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for ArcSoft .

The Trend Of ROCE

In terms of ArcSoft's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.9% 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On ArcSoft's 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 ArcSoft. And there could be an opportunity here if other metrics look good too, because the stock has declined 57% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing to note, we've identified 1 warning sign with ArcSoft and understanding it should be part of your investment process.

While ArcSoft isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

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