The 22% Return On Capital At Far-Eastern Shipping (MCX:FESH) Got Our Attention

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Far-Eastern Shipping's (MCX:FESH) returns on capital, so let's have a look.

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. 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 5.6%.

See our latest analysis for Far-Eastern Shipping

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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

Far-Eastern Shipping has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 99%. The company is now earning ₽0.2 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 37% less capital than it was five years ago. 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. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From Far-Eastern Shipping's ROCE

In a nutshell, we're pleased to see that Far-Eastern Shipping has been able to generate higher returns from less capital. Since the stock has returned a staggering 347% 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.

Like most companies, Far-Eastern Shipping does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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