Capital Allocation Trends At Mun Siong Engineering (SGX:MF6) Aren't Ideal

What underlying fundamental trends can indicate that a company might be in decline? 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Mun Siong Engineering (SGX:MF6), the trends above didn't look too great.

Understanding 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. To calculate this metric for Mun Siong Engineering, this is the formula:

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

0.00004 = S$3.0k ÷ (S$78m - S$17m) (Based on the trailing twelve months to June 2021).

So, Mun Siong Engineering has an ROCE of 0.004%. Even though it's in line with the industry average of 0.1%, it's still a low return by itself.

See our latest analysis for Mun Siong Engineering

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mun Siong Engineering's ROCE against it's prior returns. If you'd like to look at how Mun Siong Engineering 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 Mun Siong Engineering's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 6.7%, however they're now substantially lower than that as we saw above. 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 Mun Siong Engineering to turn into a multi-bagger.

What We Can Learn From Mun Siong Engineering's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 15% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 4 warning signs for Mun Siong Engineering (2 don't sit too well with us) you should be aware of.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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