Can Steamships Trading (ASX:SST) Turn Things Around?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Steamships Trading (ASX:SST), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What is it?

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 Steamships Trading, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.066 = K74m ÷ (K1.5b - K351m) (Based on the trailing twelve months to June 2020).

Therefore, Steamships Trading has an ROCE of 6.6%. In absolute terms, that's a low return but it's around the Industrials industry average of 5.9%.

View our latest analysis for Steamships Trading

Historical performance is a great place to start when researching a stock so above you can see the gauge for Steamships Trading's ROCE against it's prior returns. If you're interested in investigating Steamships Trading's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Steamships Trading's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 15% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Steamships Trading becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Steamships Trading is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 41% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know about the risks facing Steamships Trading, we've discovered 1 warning sign that you should be aware of.

While Steamships Trading 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.

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This article by Simply Wall St is general in nature. 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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