Stock Analysis

Singapore Post (SGX:S08) Will Be Hoping To Turn Its Returns On Capital Around

SGX:S08
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What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Singapore Post (SGX:S08) we aren't filled with optimism, but let's investigate further.

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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. Analysts use this formula to calculate it for Singapore Post:

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

0.037 = S$79m ÷ (S$2.7b - S$595m) (Based on the trailing twelve months to March 2021).

So, Singapore Post has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Logistics industry average of 8.5%.

View our latest analysis for Singapore Post

roce
SGX:S08 Return on Capital Employed May 9th 2021

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

What Can We Tell From Singapore Post's ROCE Trend?

In terms of Singapore Post's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 9.9%, 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. 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 Post becoming one if things continue as they have.

Our Take On Singapore Post's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 46% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

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

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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