Will StealthGas' (NASDAQ:GASS) Growth In ROCE Persist?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at StealthGas (NASDAQ:GASS) and its trend of ROCE, we really liked what we saw.

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

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 StealthGas is:

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

0.034 = US$29m ÷ (US$949m - US$101m) (Based on the trailing twelve months to September 2020).

Therefore, StealthGas has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 9.0%.

See our latest analysis for StealthGas

In the above chart we have measured StealthGas' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 31% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. 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 StealthGas' ROCE

To sum it up, StealthGas is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 31% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing: We've identified 4 warning signs with StealthGas (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

While StealthGas 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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