Returns On Capital At Sin Heng Heavy Machinery (SGX:BKA) Paint A Concerning Picture

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Sin Heng Heavy Machinery (SGX:BKA), the trends above didn't look too great.

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. Analysts use this formula to calculate it for Sin Heng Heavy Machinery:

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

0.01 = S$1.2m ÷ (S$127m - S$7.6m) (Based on the trailing twelve months to December 2020).

Therefore, Sin Heng Heavy Machinery has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 1.8%.

Check out our latest analysis for Sin Heng Heavy Machinery

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sin Heng Heavy Machinery's ROCE against it's prior returns. If you'd like to look at how Sin Heng Heavy Machinery has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Sin Heng Heavy Machinery's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 2.7% that they were earning five years ago. 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 Sin Heng Heavy Machinery becoming one if things continue as they have.

On a related note, Sin Heng Heavy Machinery has decreased its current liabilities to 6.0% 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.

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. It should come as no surprise then that the stock has fallen 22% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Sin Heng Heavy Machinery (including 1 which is significant) .

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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