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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. And from a first read, things don't look too good at SBS Transit (SGX:S61), so let's see why.
Return On Capital Employed (ROCE): What Is It?
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 SBS Transit, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = S$73m ÷ (S$1.2b - S$420m) (Based on the trailing twelve months to September 2023).
Thus, SBS Transit has an ROCE of 9.2%. In absolute terms, that's a low return, but it's much better than the Transportation industry average of 5.9%.
Check out our latest analysis for SBS Transit
Historical performance is a great place to start when researching a stock so above you can see the gauge for SBS Transit's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of SBS Transit, check out these free graphs here.
The Trend Of ROCE
In terms of SBS Transit's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 12%, 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. 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 SBS Transit becoming one if things continue as they have.
The Bottom Line On SBS Transit'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. Investors must expect better things on the horizon though because the stock has risen 15% in 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.
One final note, you should learn about the 2 warning signs we've spotted with SBS Transit (including 1 which is potentially serious) .