Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at First Ship Lease Trust (SGX:D8DU) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on First Ship Lease Trust is:

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

0.11 = US$6.8m ÷ (US$66m - US$4.2m) (Based on the trailing twelve months to June 2023).

So, First Ship Lease Trust has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Shipping industry.

View our latest analysis for First Ship Lease Trust

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're interested in investigating First Ship Lease Trust's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For First Ship Lease Trust Tell Us?

First Ship Lease Trust has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 115%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, First Ship Lease Trust appears to been achieving more with less, since the business is using 69% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 6.5%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Key Takeaway

In the end, First Ship Lease Trust has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a staggering 258% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, First Ship Lease Trust does come with some risks, and we've found 2 warning signs that 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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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.