Investors Should Be Encouraged By Far-Eastern Shipping's (MCX:FESH) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. And in light of that, the trends we're seeing at Far-Eastern Shipping's (MCX:FESH) look very promising so lets take a look.

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 Far-Eastern Shipping is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.22 = ₽7.6b ÷ (₽51b - ₽17b) (Based on the trailing twelve months to June 2020).

So, Far-Eastern Shipping has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Shipping industry average of 4.7%.

Check out our latest analysis for Far-Eastern Shipping

Historical performance is a great place to start when researching a stock so above you can see the gauge for Far-Eastern Shipping's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Far-Eastern Shipping, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We're pretty happy with how the ROCE has been trending at Far-Eastern Shipping. The data shows that returns on capital have increased by 99% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 37% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 33% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Our Take On Far-Eastern Shipping's ROCE

From what we've seen above, Far-Eastern Shipping has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a staggering 714% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Far-Eastern Shipping can keep these trends up, it could have a bright future ahead.

Far-Eastern Shipping does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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