Duty Free International (SGX:5SO) Could Be At Risk Of Shrinking As A Company

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Duty Free International (SGX:5SO), we weren't too upbeat about how things were going.

What Is 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. To calculate this metric for Duty Free International, this is the formula:

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

0.002 = RM861k ÷ (RM477m - RM39m) (Based on the trailing twelve months to August 2022).

So, Duty Free 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 8.2%.

Check out our latest analysis for Duty Free 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're interested in investigating Duty Free International's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Duty Free International Tell Us?

In terms of Duty Free International's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 0.2% we see today. On top of that, the business is utilizing 28% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

Our Take On Duty Free International's ROCE

In summary, it's unfortunate that Duty Free International is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 36% 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.

Duty Free International does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those can't be ignored...

While Duty Free International 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.