What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Sunningdale Tech (SGX:BHQ), we've spotted some signs that it could be struggling, so let's investigate.
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. The formula for this calculation on Sunningdale Tech is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.044 = S$19m ÷ (S$715m - S$275m) (Based on the trailing twelve months to June 2020).
So, Sunningdale Tech has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 7.7%.
In the above chart we have a measured Sunningdale Tech's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Sunningdale Tech here for free.
What Can We Tell From Sunningdale Tech's ROCE Trend?
In terms of Sunningdale Tech's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 6.5% 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. 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. If these trends continue, we wouldn't expect Sunningdale Tech to turn into a multi-bagger.
Our Take On Sunningdale Tech's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. However the stock has delivered a 85% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
On a separate note, we've found 1 warning sign for Sunningdale Tech you'll probably want to know about.
While Sunningdale Tech isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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