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If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Singapore Telecommunications (SGX:Z74), 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. 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$47b - S$6.9b) (Based on the trailing twelve months to September 2023).
Thus, Singapore Telecommunications has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Telecom industry average of 11%.
View our latest analysis for Singapore Telecommunications
Above you can see how the current ROCE for Singapore Telecommunications compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Singapore Telecommunications here for free.
So How Is Singapore Telecommunications' ROCE Trending?
In terms of Singapore Telecommunications' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.7% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. 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.
The Key Takeaway
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. Investors must expect better things on the horizon though because the stock has risen 2.2% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.