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When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Singapore Shipping (SGX:S19), we weren't too upbeat about how things were going.
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. 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)
0.043 = US$7.8m ÷ (US$196m - US$15m) (Based on the trailing twelve months to September 2024).
Thus, Singapore Shipping has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Shipping industry average of 8.4%.
Check out our latest analysis for Singapore Shipping
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're interested in investigating Singapore Shipping's past further, check out this free graph covering Singapore Shipping's past earnings, revenue and cash flow.
What Does the ROCE Trend For Singapore Shipping Tell Us?
We are a bit worried about the trend of returns on capital at Singapore Shipping. About five years ago, returns on capital were 6.9%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Singapore Shipping to turn into a multi-bagger.
Our Take On Singapore Shipping's ROCE
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 42% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.