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Singapore Telecommunications Limited (SGX:Z74) Might Not Be A Great Investment

Today we'll evaluate Singapore Telecommunications Limited (SGX:Z74) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for Singapore Telecommunications:

0.057 = S$2.2b ÷ (S$49b - S$11b) (Based on the trailing twelve months to December 2019.)

So, Singapore Telecommunications has an ROCE of 5.7%.

View our latest analysis for Singapore Telecommunications

Is Singapore Telecommunications's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Singapore Telecommunications's ROCE is meaningfully below the Telecom industry average of 8.1%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Singapore Telecommunications stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.

The image below shows how Singapore Telecommunications's ROCE compares to its industry, and you can click it to see more detail on its past growth.

SGX:Z74 Past Revenue and Net Income May 19th 2020
SGX:Z74 Past Revenue and Net Income May 19th 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Singapore Telecommunications.

What Are Current Liabilities, And How Do They Affect Singapore Telecommunications's ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Singapore Telecommunications has current liabilities of S$11b and total assets of S$49b. Therefore its current liabilities are equivalent to approximately 22% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

The Bottom Line On Singapore Telecommunications's ROCE

If Singapore Telecommunications continues to earn an uninspiring ROCE, there may be better places to invest. You might be able to find a better investment than Singapore Telecommunications. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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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. Thank you for reading.