Capital Allocation Trends At Renaissance United (SGX:I11) Aren't Ideal

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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 Renaissance United (SGX:I11), so let's see why.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Renaissance United:

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

0.011 = S$950k ÷ (S$137m - S$48m) (Based on the trailing twelve months to January 2021).

So, Renaissance United has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Gas Utilities industry average of 7.7%.

Check out our latest analysis for Renaissance United

Historical performance is a great place to start when researching a stock so above you can see the gauge for Renaissance United's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Renaissance United, check out these free graphs here.

How Are Returns Trending?

We are a bit anxious about the trends of ROCE at Renaissance United. To be more specific, today's ROCE was 3.0% five years ago but has since fallen to 1.1%. On top of that, the business is utilizing 24% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 35%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.1%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line On Renaissance United's ROCE

In summary, it's unfortunate that Renaissance United is shrinking its capital base and also generating lower returns.

If you want to continue researching Renaissance United, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Renaissance United isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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