Stock Analysis

Is Soft-World International (GTSM:5478) A Future Multi-bagger?

TPEX:5478
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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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Soft-World International (GTSM:5478) and its trend of ROCE, we really liked what we saw.

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 Soft-World International, this is the formula:

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

0.14 = NT$1.1b ÷ (NT$13b - NT$6.0b) (Based on the trailing twelve months to September 2020).

Therefore, Soft-World International has an ROCE of 14%. In absolute terms, that's a pretty standard return but compared to the Entertainment industry average it falls behind.

See our latest analysis for Soft-World International

roce
GTSM:5478 Return on Capital Employed February 5th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Soft-World International's ROCE against it's prior returns. If you'd like to look at how Soft-World International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Soft-World International's ROCE Trending?

Soft-World International has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 245% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a separate but related note, it's important to know that Soft-World International has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, we're delighted to see that Soft-World International has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 66% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Soft-World International, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Soft-World International may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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