Mun Siong Engineering's (SGX:MF6) Returns On Capital Not Reflecting Well On The Business

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. In light of that, from a first glance at Mun Siong Engineering (SGX:MF6), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Mun Siong Engineering is:

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

0.027 = S$1.6m ÷ (S$74m - S$15m) (Based on the trailing twelve months to June 2022).

Therefore, Mun Siong Engineering has an ROCE of 2.7%. On its own that's a low return, but compared to the average of 1.4% generated by the Construction industry, it's much better.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Mun Siong Engineering, check out these free graphs here.

What Can We Tell From Mun Siong Engineering's ROCE Trend?

We are a bit worried about the trend of returns on capital at Mun Siong Engineering. About five years ago, returns on capital were 3.9%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Mun Siong Engineering to turn into a multi-bagger.

Our Take On 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. In spite of that, the stock has delivered a 5.1% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Mun Siong Engineering (of which 2 can't be ignored!) that you should know about.

While Mun Siong Engineering 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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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.