There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Genco Shipping & Trading's (NYSE:GNK) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Genco Shipping & Trading, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = US$93m ÷ (US$1.1b - US$29m) (Based on the trailing twelve months to June 2023).
So, Genco Shipping & Trading has an ROCE of 8.4%. Ultimately, that's a low return and it under-performs the Shipping industry average of 11%.
In the above chart we have measured Genco Shipping & Trading's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Genco Shipping & Trading Tell Us?
Genco Shipping & Trading has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 406% over the trailing five years. The company is now earning US$0.08 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 23% less capital than it was five years ago. Genco Shipping & Trading may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
What We Can Learn From 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 solid 43% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Genco Shipping & Trading can keep these trends up, it could have a bright future ahead.
One more thing, we've spotted 2 warning signs facing Genco Shipping & Trading that you might find interesting.
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.