Here's What We Make Of Samudera Shipping Line's (SGX:S56) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. And from a first read, things don't look too good at Samudera Shipping Line (SGX:S56), so let's see why.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Samudera Shipping Line is:

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

0.043 = US$9.9m ÷ (US$282m - US$52m) (Based on the trailing twelve months to June 2020).

So, Samudera Shipping Line has an ROCE of 4.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.3%.

View our latest analysis for Samudera Shipping Line

Historical performance is a great place to start when researching a stock so above you can see the gauge for Samudera Shipping Line's ROCE against it's prior returns. If you're interested in investigating Samudera Shipping Line's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We are a bit anxious about the trends of ROCE at Samudera Shipping Line. Unfortunately, returns have declined substantially over the last five years to the 4.3% we see today. On top of that, the business is utilizing 36% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Key Takeaway

To see Samudera Shipping Line reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors must expect better things on the horizon though because the stock has risen 36% 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.

One more thing, we've spotted 3 warning signs facing Samudera Shipping Line that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

When trading Samudera Shipping Line or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.