Investors Should Be Encouraged By Ardmore Shipping's (NYSE:ASC) Returns On Capital

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. 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 Ardmore Shipping's (NYSE:ASC) returns on capital, so let's have a look.

What Is 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. To calculate this metric for Ardmore Shipping, this is the formula:

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

0.21 = US$145m ÷ (US$742m - US$41m) (Based on the trailing twelve months to June 2024).

So, Ardmore Shipping has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 12%.

View our latest analysis for Ardmore Shipping

In the above chart we have measured Ardmore Shipping's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Ardmore Shipping .

What Can We Tell From Ardmore Shipping's ROCE Trend?

Shareholders will be relieved that Ardmore Shipping has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 21% on its capital. While returns have increased, the amount of capital employed by Ardmore Shipping has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line On Ardmore Shipping's ROCE

To bring it all together, Ardmore Shipping has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 239% to shareholders over the last five years, it looks like investors are recognizing 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 found 2 warning signs for Ardmore Shipping (1 makes us a bit uncomfortable) you should be aware of.

Ardmore Shipping is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.