Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don’t think Pyxis Tankers (NASDAQ:PXS) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.
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 Pyxis Tankers is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.016 = US$1.3m ÷ (US$91m – US$8.4m) (Based on the trailing twelve months to June 2020).
Therefore, Pyxis Tankers has an ROCE of 1.6%. In absolute terms, that’s a low return and it also under-performs the Shipping industry average of 6.8%.
Above you can see how the current ROCE for Pyxis Tankers 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 Pyxis Tankers here for free.
The Trend Of ROCE
We’re a bit concerned with the trends, because the business is applying 37% less capital than it was five years ago and returns on that capital have stayed flat. To us that doesn’t look like a multi-bagger because the company appears to be selling assets and it’s returns aren’t increasing. In addition to that, since the ROCE doesn’t scream “quality” at 1.6%, it’s hard to get excited about these developments.
In summary, Pyxis Tankers isn’t reinvesting funds back into the business and returns aren’t growing. And in the last three years, the stock has given away 61% so the market doesn’t look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren’t typical of multi-baggers, so if that’s what you’re after, we think you might have more luck elsewhere.
If you want to know some of the risks facing Pyxis Tankers we’ve found 3 warning signs (2 are significant!) that you should be aware of before investing here.
While Pyxis Tankers 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. 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.
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