Is SIA Engineering (SGX:S59) Set To Make A Turnaround?

When researching a stock for investment, what can tell us that the company is 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into SIA Engineering (SGX:S59), the trends above didn't look too great.

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. To calculate this metric for SIA Engineering, this is the formula:

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

0.0042 = S$7.0m ÷ (S$1.9b - S$224m) (Based on the trailing twelve months to September 2020).

Thus, SIA Engineering has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 4.7%.

See our latest analysis for SIA Engineering

Above you can see how the current ROCE for SIA Engineering compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From SIA Engineering's ROCE Trend?

We are a bit worried about the trend of returns on capital at SIA Engineering. To be more specific, the ROCE was 6.9% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on SIA Engineering becoming one if things continue as they have.

Our Take On SIA Engineering's ROCE

In summary, it's unfortunate that SIA Engineering is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 31% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing SIA Engineering 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.

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