Stock Analysis

Returns On Capital At Singapore Telecommunications (SGX:Z74) Paint A Concerning Picture

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What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing 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. So after glancing at the trends within Singapore Telecommunications (SGX:Z74), we weren't too hopeful.

Return On Capital Employed (ROCE): What Is It?

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 Singapore Telecommunications is:

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

0.027 = S$1.1b ÷ (S$47b - S$8.0b) (Based on the trailing twelve months to September 2022).

Therefore, Singapore Telecommunications has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Telecom industry average of 11%.

See our latest analysis for Singapore Telecommunications

SGX:Z74 Return on Capital Employed February 2nd 2023

Above you can see how the current ROCE for Singapore Telecommunications 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 Singapore Telecommunications here for free.

What Does the ROCE Trend For Singapore Telecommunications Tell Us?

We are a bit worried about the trend of returns on capital at Singapore Telecommunications. To be more specific, the ROCE was 6.7% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Singapore Telecommunications to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Singapore Telecommunications is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we've found 1 warning sign for Singapore Telecommunications that we think you should be aware of.

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