Singapore Telecommunications (SGX:Z74) Will Be Hoping To Turn Its Returns On Capital Around

What underlying fundamental trends can indicate that a company might be 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Singapore Telecommunications (SGX:Z74), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

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)

0.026 = S$1.0b ÷ (S$47b - S$8.0b) (Based on the trailing twelve months to December 2022).

So, Singapore Telecommunications has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Telecom industry average of 11%.

View our latest analysis for Singapore Telecommunications

In the above chart we have measured Singapore Telecommunications' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Singapore Telecommunications here for free.

SWOT Analysis for Singapore Telecommunications

So How Is Singapore Telecommunications' ROCE Trending?

We are a bit worried about the trend of returns on capital at Singapore Telecommunications. Unfortunately the returns on capital have diminished from the 7.0% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Singapore Telecommunications becoming one if things continue as they have.

The Bottom Line 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. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to continue researching Singapore Telecommunications, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Singapore Telecommunications 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.