Investors Will Want First Ship Lease Trust's (SGX:D8DU) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, First Ship Lease Trust (SGX:D8DU) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for First Ship Lease Trust:

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

0.10 = US$14m ÷ (US$162m - US$19m) (Based on the trailing twelve months to December 2020).

So, First Ship Lease Trust has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Shipping industry average of 4.5% it's much better.

View our latest analysis for First Ship Lease Trust

Above you can see how the current ROCE for First Ship Lease Trust 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 First Ship Lease Trust here for free.

What Can We Tell From First Ship Lease Trust's ROCE Trend?

We're pretty happy with how the ROCE has been trending at First Ship Lease Trust. The figures show that over the last five years, returns on capital have grown by 110%. The company is now earning US$0.1 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 72% 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.

The Key Takeaway

From what we've seen above, First Ship Lease Trust has managed to increase it's returns on capital all the while reducing it's capital base. Considering the stock has delivered 37% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

First Ship Lease Trust does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

If you decide to trade First Ship Lease Trust, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.