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. 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 Genco Shipping & Trading (NYSE:GNK) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on Genco Shipping & Trading is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = US$55m ÷ (US$1.1b - US$39m) (Based on the trailing twelve months to March 2024).
Thus, Genco Shipping & Trading has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Shipping industry average of 8.2%.
Above you can see how the current ROCE for Genco Shipping & Trading compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Genco Shipping & Trading for free.
What The Trend Of ROCE Can Tell Us
Genco Shipping & Trading has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 73%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 28% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
Our Take On Genco Shipping & Trading's ROCE
In summary, it's great to see that Genco Shipping & Trading has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has returned a staggering 316% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Genco Shipping & Trading does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is a bit unpleasant...
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.