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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. 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Sarine Technologies (SGX:U77), the trends above didn't look too great.
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. The formula for this calculation on Sarine Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = US$669k ÷ (US$72m - US$9.0m) (Based on the trailing twelve months to December 2024).
Thus, Sarine Technologies has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 4.4%.
See our latest analysis for Sarine Technologies
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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Sarine Technologies.
What Does the ROCE Trend For Sarine Technologies Tell Us?
We are a bit worried about the trend of returns on capital at Sarine Technologies. About five years ago, returns on capital were 1.7%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Sarine Technologies becoming one if things continue as they have.
What We Can Learn From Sarine Technologies' ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 46% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.