What underlying fundamental trends can indicate that a company might be in decline?
Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed.
Basically, the company is earning less on its investments and it is also reducing its total assets. So after we looked into $Singtel(Z74.SG)$, the trends above didn't look too great.
What is Return On Capital Employed (ROCE)?
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.
To calculate this metric for Singapore Telecommunications, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = S$1.1b ÷ (S$48b - S$7.9b) (Based on the trailing twelve months to December 2021).
Thus, Singapore Telecommunications has a ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Telecom industry average of 10%.
How Are Returns Trending?
There is reason to be cautious about Singapore Telecommunications, given the returns are trending downwards. About five years ago, returns on capital were 7.9%, however, they're now substantially lower than that as we saw above.
Meanwhile, capital employed in the business has stayed roughly flat over the period. 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 Telecommunications becoming one if things continue as they have.
In Conclusion...
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.
Long-term shareholders who've owned the stock over the last five years have experienced a 13% depreciation in their investment, so it appears the market might not like these trends either.
That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.