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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. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Singapore Shipping (SGX:S19), so let's see why.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Singapore Shipping is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = US$8.0m ÷ (US$189m - US$12m) (Based on the trailing twelve months to March 2024).
So, Singapore Shipping has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Shipping industry average of 7.2%.
View 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.
So How Is Singapore Shipping's ROCE Trending?
In terms of Singapore Shipping's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 7.3%, 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. If these trends continue, we wouldn't expect Singapore Shipping to turn into a multi-bagger.
The Bottom Line
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. Despite the concerning underlying trends, the stock has actually gained 0.6% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.