Here's What's Concerning About Tsakos Energy Navigation's (NYSE:TNP) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Tsakos Energy Navigation (NYSE:TNP), we weren't too hopeful.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Tsakos Energy Navigation is:

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

0.016 = US$44m ÷ (US$3.1b - US$360m) (Based on the trailing twelve months to June 2022).

So, Tsakos Energy Navigation has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 16%.

Check out the opportunities and risks within the US Oil and Gas industry.

In the above chart we have measured Tsakos Energy Navigation'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 report for Tsakos Energy Navigation.

What Can We Tell From Tsakos Energy Navigation's ROCE Trend?

There is reason to be cautious about Tsakos Energy Navigation, given the returns are trending downwards. To be more specific, the ROCE was 2.6% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Tsakos Energy Navigation becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Tsakos Energy Navigation is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 14% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, Tsakos Energy Navigation does come with some risks, and we've found 2 warning signs that you should be aware of.

While Tsakos Energy Navigation 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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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.