What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Accuracy Shipping (NSE:ACCURACY), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
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. Analysts use this formula to calculate it for Accuracy Shipping:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = ₹165m ÷ (₹1.9b - ₹658m) (Based on the trailing twelve months to December 2020).
Thus, Accuracy Shipping has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Logistics industry average of 12%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Accuracy Shipping's ROCE against it's prior returns. If you'd like to look at how Accuracy Shipping has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Accuracy Shipping's ROCE Trending?
In terms of Accuracy Shipping's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 30% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a related note, Accuracy Shipping has decreased its current liabilities to 35% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
In summary, Accuracy Shipping is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 215% return in the last year, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
If you want to know some of the risks facing Accuracy Shipping we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.
While Accuracy Shipping 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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