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

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Singapore Telecommunications (SGX:Z74), we weren't too upbeat about how things were going.

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 Singapore Telecommunications is:

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

0.029 = S$1.2b ÷ (S$47b - S$6.9b) (Based on the trailing twelve months to December 2023).

Thus, Singapore Telecommunications has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Telecom industry average of 12%.

View our latest analysis for Singapore Telecommunications

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 for free.

What Can We Tell From Singapore Telecommunications' ROCE Trend?

In terms of Singapore Telecommunications' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 6.4%, 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. 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.

Our Take On Singapore Telecommunications' ROCE

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. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. 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 Singapore Telecommunications (of which 1 makes us a bit uncomfortable!) that you should know about.

While Singapore Telecommunications 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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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.