Sound Group (NASDAQ:SOGP) Is Looking To Continue Growing Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Sound Group (NASDAQ:SOGP) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Sound Group, this is the formula:

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

0.037 = CN¥16m ÷ (CN¥701m - CN¥274m) (Based on the trailing twelve months to September 2023).

Therefore, Sound Group has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 12%.

See our latest analysis for Sound Group

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

What The Trend Of ROCE Can Tell Us

The fact that Sound Group is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 3.7% on its capital. And unsurprisingly, like most companies trying to break into the black, Sound Group is utilizing 417% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 39%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On Sound Group's ROCE

To the delight of most shareholders, Sound Group has now broken into profitability. However the stock is down a substantial 96% in the last three years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you want to continue researching Sound Group, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Sound Group 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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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.

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