The Returns On Capital At Singapore Shipping (SGX:S19) Don't Inspire Confidence

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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Singapore Shipping (of which 1 is potentially serious!) that you should know about.

While Singapore Shipping may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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