How Has Singamas Container Holdings (HKG:716) Allocated Its Capital?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Singamas Container Holdings (HKG:716), we weren't too upbeat about how things were going.

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. The formula for this calculation on Singamas Container Holdings is:

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

0.016 = US$8.2m ÷ (US$641m - US$123m) (Based on the trailing twelve months to June 2020).

Therefore, Singamas Container Holdings has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.7%.

See our latest analysis for Singamas Container Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Singamas Container Holdings, check out these free graphs here.

What Does the ROCE Trend For Singamas Container Holdings Tell Us?

We are a bit anxious about the trends of ROCE at Singamas Container Holdings. Unfortunately, returns have declined substantially over the last five years to the 1.6% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 46% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, Singamas Container Holdings has done well to pay down its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Singamas Container Holdings' ROCE

To see Singamas Container Holdings reducing the capital employed in the business in tandem with diminishing returns, is concerning. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 48% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Singamas Container Holdings (including 1 which is a bit unpleasant) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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