Returns On Capital At Stamford Land (SGX:H07) Paint A Concerning Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Stamford Land (SGX:H07) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 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).

So, Stamford Land has an ROCE of 3.4%. On its own that's a low return, but compared to the average of 0.9% generated by the Hospitality industry, it's much better.

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.

The Trend Of ROCE

When we looked at the ROCE trend at Stamford Land, we didn't gain much 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. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Stamford Land has decreased its current liabilities to 5.1% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Stamford Land's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Stamford Land have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 18% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Stamford Land (of which 1 is significant!) that you should know about.

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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