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When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into ComfortDelGro (SGX:C52), we weren't too upbeat about how things were going.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on ComfortDelGro is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = S$288m ÷ (S$5.1b - S$1.3b) (Based on the trailing twelve months to June 2024).
Thus, ComfortDelGro has an ROCE of 7.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.6%.
Check out our latest analysis for ComfortDelGro
In the above chart we have measured ComfortDelGro's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for ComfortDelGro .
What Can We Tell From ComfortDelGro's ROCE Trend?
There is reason to be cautious about ComfortDelGro, given the returns are trending downwards. To be more specific, the ROCE was 11% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect ComfortDelGro to turn into a multi-bagger.
What We Can Learn From ComfortDelGro's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 29% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
On a final note, we've found 1 warning sign for ComfortDelGro that we think you should be aware of.