Is Genting Singapore (SGX:G13) Using Capital Effectively?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. 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)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Genting Singapore is:

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

0.027 = S$216m ÷ (S$8.7b - S$607m) (Based on the trailing twelve months to June 2020).

So, Genting Singapore has an ROCE of 2.7%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 1.8%.

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'd like to see what analysts are forecasting going forward, you should check out our free report for Genting Singapore.

The Trend Of ROCE

In terms of Genting Singapore's historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 6.9% five years ago but has since fallen to 2.7%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 28% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

Our Take On Genting Singapore's ROCE

In summary, it's unfortunate that Genting Singapore is shrinking its capital base and also generating lower returns. Yet despite these concerning fundamentals, the stock has performed strongly with a 43% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know about the risks facing Genting Singapore, we've discovered 1 warning sign that you should be aware of.

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This article by Simply Wall St is general in nature. 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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