There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we’ve noticed some promising trends at Seanergy Maritime Holdings (NASDAQ:SHIP) so let’s look a bit deeper.
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. Analysts use this formula to calculate it for Seanergy Maritime Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.074 = US$7.2m ÷ (US$296m – US$199m) (Based on the trailing twelve months to June 2020).
So, Seanergy Maritime Holdings has an ROCE of 7.4%. On its own that’s a low return on capital but it’s in line with the industry’s average returns of 6.8%.
In the above chart we have a measured Seanergy Maritime Holdings’ 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.
How Are Returns Trending?
Seanergy Maritime Holdings has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it’s earning 7.4% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Seanergy Maritime Holdings is utilizing 413% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 67% of its operations, which isn’t ideal. And with current liabilities at those levels, that’s pretty high.
The Key Takeaway
Long story short, we’re delighted to see that Seanergy Maritime Holdings’ reinvestment activities have paid off and the company is now profitable. However the stock is down a substantial 100% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
Seanergy Maritime Holdings does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are concerning…
While Seanergy Maritime Holdings 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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