Stock Analysis

Does Sophia HoldingsLtd (TYO:6942) Have The Makings Of A Multi-Bagger?

TSE:6942
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So on that note, Sophia HoldingsLtd (TYO:6942) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

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 Sophia HoldingsLtd, this is the formula:

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

0.072 = JP¥388m ÷ (JP¥9.2b - JP¥3.8b) (Based on the trailing twelve months to September 2020).

Therefore, Sophia HoldingsLtd has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the IT industry average of 15%.

Check out our latest analysis for Sophia HoldingsLtd

roce
JASDAQ:6942 Return on Capital Employed January 29th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sophia HoldingsLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Sophia HoldingsLtd, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

The fact that Sophia HoldingsLtd is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 7.2% which is a sight for sore eyes. In addition to that, Sophia HoldingsLtd is employing 490% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 41%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Sophia HoldingsLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

In Conclusion...

Long story short, we're delighted to see that Sophia HoldingsLtd's reinvestment activities have paid off and the company is now profitable. Given the stock has declined 18% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we found 3 warning signs for Sophia HoldingsLtd (1 is a bit unpleasant) you should be aware of.

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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