Returns On Capital Signal Tricky Times Ahead For Softstar Entertainment (GTSM:6111)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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 Softstar Entertainment (GTSM:6111), it didn't seem to tick all of these boxes.

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 Softstar Entertainment is:

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

0.14 = NT$138m ÷ (NT$1.2b - NT$240m) (Based on the trailing twelve months to December 2020).

Therefore, Softstar Entertainment has an ROCE of 14%. That's a pretty standard return and it's in line with the industry average of 14%.

View our latest analysis for Softstar Entertainment

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

How Are Returns Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 18% five years ago, while the business's capital employed increased by 98%. Usually this isn't ideal, but given Softstar Entertainment conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Softstar Entertainment probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Softstar Entertainment has done well to pay down its current liabilities to 20% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Softstar Entertainment's ROCE

To conclude, we've found that Softstar Entertainment is reinvesting in the business, but returns have been falling. Since the stock has declined 29% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Softstar Entertainment has the makings of a multi-bagger.

Like most companies, Softstar Entertainment does come with some risks, and we've found 1 warning sign that you should be aware of.

While Softstar Entertainment isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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