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If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Singapore Shipping (SGX:S19), we've spotted some signs that it could be struggling, so let's investigate.
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 Singapore Shipping, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = US$10m ÷ (US$183m - US$14m) (Based on the trailing twelve months to September 2022).
Thus, Singapore Shipping has an ROCE of 6.1%. In absolute terms, that's a low return, but it's much better than the Shipping industry average of 4.9%.
View our latest analysis for Singapore Shipping
Historical performance is a great place to start when researching a stock so above you can see the gauge for Singapore Shipping's ROCE against it's prior returns. If you'd like to look at how Singapore Shipping has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
There is reason to be cautious about Singapore Shipping, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 7.9% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Singapore Shipping becoming one if things continue as they have.
What We Can Learn From Singapore Shipping's ROCE
In summary, it's unfortunate that Singapore Shipping is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 5.3% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.