Capital Allocation Trends At Soup Holdings (SGX:5KI) Aren't Ideal

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. However, after briefly looking over the numbers, we don't think Soup Holdings (SGX:5KI) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Soup Holdings is:

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

0.084 = S$1.6m ÷ (S$31m - S$11m) (Based on the trailing twelve months to June 2023).

Thus, Soup Holdings has an ROCE of 8.4%. On its own that's a low return, but compared to the average of 3.9% generated by the Hospitality industry, it's much better.

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'd like to look at how Soup Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Soup Holdings' ROCE Trending?

In terms of Soup Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.4% from 23% 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 Key Takeaway

While returns have fallen for Soup Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 30% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 4 warning signs with Soup Holdings (at least 2 which can't be ignored) , and understanding these would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.