How Has Noel Gifts International (SGX:543) Allocated Its Capital?

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. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Noel Gifts International (SGX:543), we weren't too hopeful.

What is 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. Analysts use this formula to calculate it for Noel Gifts International:

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

0.0021 = S$73k ÷ (S$37m - S$3.2m) (Based on the trailing twelve months to June 2020).

So, Noel Gifts International has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 9.2%.

Check out our latest analysis for Noel Gifts International

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Noel Gifts International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Noel Gifts International's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 3.5%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Noel Gifts International becoming one if things continue as they have.

The Bottom Line On Noel Gifts International's ROCE

In summary, it's unfortunate that Noel Gifts International is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 14% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 5 warning signs with Noel Gifts International (at least 2 which don't sit too well with us) , and understanding these would certainly be useful.

While Noel Gifts International may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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