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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 on that note, Sound Group (NASDAQ:SOGP) looks quite promising in regards to its trends of return on capital.

Understanding 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. Analysts use this formula to calculate it for Sound Group:

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%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 10%.

View our latest analysis for Sound Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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 Can We Tell From Sound Group's ROCE Trend?

Sound Group has recently broken into profitability so their prior investments seem to be paying off. 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.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 39%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

In summary, it's great to see that Sound Group has managed to break into profitability and is continuing to reinvest in its business. Although the company may be facing some issues elsewhere since the stock has plunged 96% in the last three years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.