Some Investors May Be Worried About Soulbrain's (KOSDAQ:357780) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Soulbrain (KOSDAQ:357780), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for Soulbrain:

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

0.17 = ₩151b ÷ (₩984b - ₩79b) (Based on the trailing twelve months to September 2023).

So, Soulbrain has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 6.2% generated by the Chemicals industry.

Check out our latest analysis for Soulbrain

In the above chart we have measured Soulbrain's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Soulbrain .

So How Is Soulbrain's ROCE Trending?

When we looked at the ROCE trend at Soulbrain, we didn't gain much confidence. Over the last two years, returns on capital have decreased to 17% from 31% two years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Soulbrain has decreased its current liabilities to 8.0% 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.

The Bottom Line On Soulbrain's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Soulbrain have fallen, meanwhile the business is employing more capital than it was two years ago. It should come as no surprise then that the stock has fallen 13% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you're still interested in Soulbrain it's worth checking out our FREE intrinsic value approximation for A357780 to see if it's trading at an attractive price in other respects.

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. 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.