Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, we've noticed some promising trends at First Ship Lease Trust (SGX:D8DU) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for First Ship Lease Trust:

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

0.056 = US$3.5m ÷ (US$66m - US$4.3m) (Based on the trailing twelve months to December 2023).

Thus, First Ship Lease Trust has an ROCE of 5.6%. In absolute terms, that's a low return but it's around the Shipping industry average of 6.9%.

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 covering First Ship Lease Trust's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

First Ship Lease Trust has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 43%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 74% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Key Takeaway

In a nutshell, we're pleased to see that First Ship Lease Trust has been able to generate higher returns from less capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

First Ship Lease Trust does have some risks, we noticed 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

While First Ship Lease Trust may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.