Returns On Capital Signal Difficult Times Ahead For Singapore Telecommunications (SGX:Z74)

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4 days ago

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Singapore Telecommunications (SGX:Z74) we aren't filled with optimism, but let's investigate further.
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Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Singapore Telecommunications:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.036 = S$1.4b ÷ (S$47b - S$8.4b) (Based on the trailing twelve months to March 2025).
Thus, Singapore Telecommunications has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Telecom industry average of 11%.
See our latest analysis for Singapore Telecommunications
Above you can see how the current ROCE for Singapore Telecommunications compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Singapore Telecommunications for free.
What Does the ROCE Trend For Singapore Telecommunications Tell Us?
We are a bit worried about the trend of returns on capital at Singapore Telecommunications. About five years ago, returns on capital were 5.1%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Singapore Telecommunications becoming one if things continue as they have.
Our Take On Singapore Telecommunications' ROCE
In summary, it's unfortunate that Singapore Telecommunications is generating lower returns from the same amount of capital. Since the stock has skyrocketed 108% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
On a final note, we found 3 warning signs for Singapore Telecommunications (1 makes us a bit uncomfortable) you should be aware of.
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