Here's What's Concerning About Genting Singapore's (SGX:G13) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing 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. In light of that, from a first glance at Genting Singapore (SGX:G13), we've spotted some signs that it could be struggling, so let's investigate.

What is 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 Genting Singapore is:

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

0.01 = S$86m ÷ (S$8.8b - S$463m) (Based on the trailing twelve months to December 2020).

Thus, Genting Singapore has an ROCE of 1.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 0.9%.

View our latest analysis for Genting Singapore

Above you can see how the current ROCE for Genting Singapore compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Genting Singapore's ROCE Trending?

In terms of Genting Singapore's historical ROCE trend, it isn't fantastic. The company used to generate 5.0% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 27% 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.

The Key Takeaway

In summary, it's unfortunate that Genting Singapore is shrinking its capital base and also generating lower returns. In spite of that, the stock has delivered a 28% 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.

If you want to continue researching Genting Singapore, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Genting Singapore 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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