The Returns On Capital At Asian Pay Television Trust (SGX:S7OU) Don't Inspire Confidence

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Asian Pay Television Trust (SGX:S7OU) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Asian Pay Television Trust is:

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

0.034 = S$92m ÷ (S$3.0b - S$273m) (Based on the trailing twelve months to September 2020).

So, Asian Pay Television Trust has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Media industry average of 8.1%.

See our latest analysis for Asian Pay Television Trust

Above you can see how the current ROCE for Asian Pay Television Trust compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Asian Pay Television Trust here for free.

The Trend Of ROCE

There is reason to be cautious about Asian Pay Television Trust, given the returns are trending downwards. To be more specific, the ROCE was 6.1% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Asian Pay Television Trust becoming one if things continue as they have.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 67% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Asian Pay Television Trust does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Asian Pay Television Trust 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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