Here's What To Make Of Stamford Land's (SGX:H07) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Stamford Land (SGX:H07) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Stamford Land is:

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

0.034 = S$35m ÷ (S$1.1b - S$56m) (Based on the trailing twelve months to September 2020).

Therefore, Stamford Land has an ROCE of 3.4%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 2.0%.

See our latest analysis for Stamford Land

Historical performance is a great place to start when researching a stock so above you can see the gauge for Stamford Land's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Stamford Land, check out these free graphs here.

What Can We Tell From Stamford Land's ROCE Trend?

On the surface, the trend of ROCE at Stamford Land doesn't inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Stamford Land has decreased its current liabilities to 5.1% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 summary, we're somewhat concerned by Stamford Land's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 23% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Stamford Land (1 is a bit concerning) you should be aware of.

While Stamford Land 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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