How Well Is Sea & Land Integrated (GTSM:5603) Allocating Its Capital?

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Sea & Land Integrated (GTSM:5603), the trends above didn't look too great.

What is Return On Capital Employed (ROCE)?

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 Sea & Land Integrated:

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

0.03 = NT$52m ÷ (NT$2.4b - NT$732m) (Based on the trailing twelve months to September 2020).

Therefore, Sea & Land Integrated has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Transportation industry average of 5.6%.

See our latest analysis for Sea & Land Integrated

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Sea & Land Integrated has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Sea & Land Integrated. About five years ago, returns on capital were 13%, 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 Sea & Land Integrated becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Sea & Land Integrated is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 23% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we found 5 warning signs for Sea & Land Integrated (2 are significant) you should be aware of.

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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