What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Samudera Shipping Line (SGX:S56) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Samudera Shipping Line is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = US$17m ÷ (US$343m - US$70m) (Based on the trailing twelve months to December 2020).
So, Samudera Shipping Line has an ROCE of 6.3%. On its own that's a low return, but compared to the average of 2.6% generated by the Shipping industry, it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Samudera Shipping Line's ROCE against it's prior returns. If you're interested in investigating Samudera Shipping Line's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Samudera Shipping Line's ROCE Trending?
Samudera Shipping Line has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 36% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
Our Take On Samudera Shipping Line's ROCE
In summary, we're delighted to see that Samudera Shipping Line has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 88% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
On a final note, we've found 2 warning signs for Samudera Shipping Line that we think you should be aware of.
While Samudera Shipping Line isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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