Stock Analysis

Singapore Post (SGX:S08) Will Be Looking To Turn Around Its Returns

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When researching a stock for investment, what can tell us that the company is in decline? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Singapore Post (SGX:S08), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Singapore Post, this is the formula:

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

0.044 = S$93m ÷ (S$2.8b - S$720m) (Based on the trailing twelve months to March 2023).

So, Singapore Post has an ROCE of 4.4%. In absolute terms, that's a low return but it's around the Logistics industry average of 4.6%.

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SGX:S08 Return on Capital Employed June 14th 2023

In the above chart we have measured Singapore Post's 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 Post here for free.

So How Is Singapore Post's ROCE Trending?

We are a bit worried about the trend of returns on capital at Singapore Post. Unfortunately the returns on capital have diminished from the 7.0% that they were earning five years ago. 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.

What We Can Learn From Singapore Post'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. Long term shareholders who've owned the stock over the last five years have experienced a 61% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a separate note, we've found 1 warning sign for Singapore Post you'll probably want to know about.

While Singapore Post 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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