Is This A Sign of Things To Come At Penguin International (SGX:BTM)?

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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Penguin International (SGX:BTM), so let's see why.

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. To calculate this metric for Penguin International, this is the formula:

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

0.04 = S$7.1m ÷ (S$245m - S$68m) (Based on the trailing twelve months to June 2020).

So, Penguin International has an ROCE of 4.0%. Even though it's in line with the industry average of 4.3%, it's still a low return by itself.

Check out our latest analysis for Penguin International

Above you can see how the current ROCE for Penguin International compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Penguin International.

The Trend Of ROCE

There is reason to be cautious about Penguin International, given the returns are trending downwards. To be more specific, the ROCE was 20% 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. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Penguin International to turn into a multi-bagger.

What We Can Learn From Penguin International's 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. Investors must expect better things on the horizon though because the stock has risen 13% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Penguin International does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

While Penguin 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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This article by Simply Wall St is general in nature. 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.
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