Tsakos Energy Navigation (NYSE:TNP) Could Be At Risk Of Shrinking As A Company

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Tsakos Energy Navigation (NYSE:TNP), the trends above didn't look too great.

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)

0.031 = US$83m ÷ (US$3.1b - US$382m) (Based on the trailing twelve months to March 2021).

So, Tsakos Energy Navigation has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 6.9%.

Check out our latest analysis for Tsakos Energy Navigation

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.

So How Is Tsakos Energy Navigation's ROCE Trending?

In terms of Tsakos Energy Navigation's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 6.9%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. 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.

Our Take On Tsakos Energy Navigation's ROCE

In summary, it's unfortunate that Tsakos Energy Navigation is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 55% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Tsakos Energy Navigation (of which 2 don't sit too well with us!) that you should know about.

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.

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.

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