What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Tsakos Energy Navigation (NYSE:TNP), it didn't seem to tick all of these boxes.
Understanding 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. Analysts use this formula to calculate it for Tsakos Energy Navigation:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.066 = US$188m ÷ (US$3.2b - US$317m) (Based on the trailing twelve months to September 2020).
Therefore, Tsakos Energy Navigation has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 9.1%.
Above you can see how the current ROCE for Tsakos Energy Navigation compares to its prior returns on capital, but there's only so much you can tell from the past. 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 hasn't been much to report for Tsakos Energy Navigation's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Tsakos Energy Navigation in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
In summary, Tsakos Energy Navigation isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors appear hesitant that the trends will pick up because the stock has fallen 57% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
Tsakos Energy Navigation does have some risks, we noticed 5 warning signs (and 2 which are potentially serious) we think you should know about.
While Tsakos Energy Navigation may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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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