Capital Allocation Trends At Castor Maritime (NASDAQ:CTRM) Aren't Ideal

By
Simply Wall St
Published
August 07, 2021
NasdaqCM:CTRM
Source: Shutterstock

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Castor Maritime (NASDAQ:CTRM), we don't think it's current trends fit the mold of a multi-bagger.

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 Castor Maritime, this is the formula:

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

0.022 = US$7.7m ÷ (US$367m - US$20m) (Based on the trailing twelve months to June 2021).

So, Castor Maritime has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Shipping industry average of 6.7%.

See our latest analysis for Castor Maritime

roce
NasdaqCM:CTRM Return on Capital Employed August 7th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Castor Maritime's ROCE against it's prior returns. If you'd like to look at how Castor Maritime has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Castor Maritime's historical ROCE movements, the trend isn't fantastic. Over the last three years, returns on capital have decreased to 2.2% from 12% three years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Castor Maritime is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 17% over the last year, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One final note, you should learn about the 3 warning signs we've spotted with Castor Maritime (including 2 which don't sit too well with us) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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