If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Navigator Holdings (NYSE:NVGS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Navigator Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = US$41m ÷ (US$1.8b - US$115m) (Based on the trailing twelve months to September 2020).
Therefore, Navigator Holdings has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 9.4%.
In the above chart we have measured Navigator Holdings' 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.
What Can We Tell From Navigator Holdings' ROCE Trend?
In terms of Navigator Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.0%, but since then they've fallen to 2.4%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From Navigator Holdings' ROCE
In summary, Navigator Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 29% in the last five years. Therefore based on the analysis done in this article, we don't think Navigator Holdings has the makings of a multi-bagger.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Navigator Holdings (of which 1 is potentially serious!) that you should know about.
While Navigator Holdings 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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What are the risks and opportunities for Navigator Holdings?
Trading at 65.8% below our estimate of its fair value
Earnings are forecast to grow 29.71% per year
Interest payments are not well covered by earnings
Profit margins (0.6%) are lower than last year (3.6%)
Large one-off items impacting financial results
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.
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