We're Watching These Trends At Softpower International (HKG:380)

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Softpower International (HKG:380), it didn't seem to tick all of these boxes.

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. To calculate this metric for Softpower International, this is the formula:

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

0.012 = HK$8.0m ÷ (HK$783m - HK$129m) (Based on the trailing twelve months to June 2020).

Thus, Softpower International has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 5.4%.

Check out our latest analysis for Softpower International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Softpower International's ROCE against it's prior returns. If you're interested in investigating Softpower International's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Softpower International Tell Us?

In terms of Softpower International's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.2% from 9.1% five years ago. However it looks like Softpower International 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.

On a side note, Softpower International has done well to pay down its current liabilities to 17% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Softpower International's ROCE

To conclude, we've found that Softpower International is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 46% in the last five years. Therefore based on the analysis done in this article, we don't think Softpower International has the makings of a multi-bagger.

Softpower International does have some risks, we noticed 5 warning signs (and 1 which is significant) we think you should know about.

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. 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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