If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. However, after investigating Golden Ocean Group (NASDAQ:GOGL), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
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. To calculate this metric for Golden Ocean Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = US$191m ÷ (US$3.5b - US$226m) (Based on the trailing twelve months to December 2023).
So, Golden Ocean Group has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Shipping industry average of 7.7%.
Above you can see how the current ROCE for Golden Ocean Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Golden Ocean Group .
What Does the ROCE Trend For Golden Ocean Group Tell Us?
In terms of Golden Ocean Group's historical ROCE trend, it doesn't exactly demand attention. The company has employed 35% more capital in the last five years, and the returns on that capital have remained stable at 5.9%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 6.5% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
The Bottom Line On Golden Ocean Group's ROCE
As we've seen above, Golden Ocean Group's returns on capital haven't increased but it is reinvesting in the business. Yet to long term shareholders the stock has gifted them an incredible 284% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you want to know some of the risks facing Golden Ocean Group we've found 4 warning signs (2 are a bit concerning!) that you should be aware of before investing here.
While Golden Ocean Group 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.