Investors Should Be Encouraged By Scorpio Tankers' (NYSE:STNG) Returns On Capital

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 the ROCE trend of Scorpio Tankers (NYSE:STNG) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Scorpio Tankers, this is the formula:

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

0.21 = US$851m ÷ (US$4.6b - US$473m) (Based on the trailing twelve months to December 2022).

Thus, Scorpio Tankers has an ROCE of 21%. While that is an outstanding return, the rest of the Oil and Gas industry generates similar returns, on average.

See our latest analysis for Scorpio Tankers

In the above chart we have measured Scorpio Tankers' 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 report for Scorpio Tankers.

What Does the ROCE Trend For Scorpio Tankers Tell Us?

Scorpio Tankers' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 9,730% 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.

The Bottom Line On Scorpio Tankers' ROCE

To bring it all together, Scorpio Tankers has done well to increase the returns it's generating from its capital employed. And a remarkable 195% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

Like most companies, Scorpio Tankers does come with some risks, and we've found 1 warning sign that you should be aware of.

Scorpio Tankers 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.

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

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.