What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Genting Singapore (SGX:G13), it didn't seem to tick all of these boxes.
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. The formula for this calculation on Genting Singapore is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = S$728m ÷ (S$9.2b - S$709m) (Based on the trailing twelve months to June 2024).
So, Genting Singapore has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 5.0% generated by the Hospitality industry, it's much better.
Above you can see how the current ROCE for Genting Singapore 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 analyst report for Genting Singapore .
How Are Returns Trending?
Over the past five years, Genting Singapore's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Genting Singapore to be a multi-bagger going forward. That being the case, it makes sense that Genting Singapore has been paying out 70% of its earnings to its shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.
The Bottom Line On Genting Singapore's ROCE
We can conclude that in regards to Genting Singapore's returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 9.7% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
One more thing to note, we've identified 1 warning sign with Genting Singapore and understanding it should be part of your investment process.
While Genting Singapore 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
