Eagle Bulk Shipping (NASDAQ:EGLE) Is Experiencing Growth In 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Eagle Bulk Shipping (NASDAQ:EGLE) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Eagle Bulk Shipping, this is the formula:

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

0.089 = US$84m ÷ (US$1.1b - US$150m) (Based on the trailing twelve months to June 2021).

Thus, Eagle Bulk Shipping has an ROCE of 8.9%. On its own, that's a low figure but it's around the 8.2% average generated by the Shipping industry.

Check out our latest analysis for Eagle Bulk Shipping

Above you can see how the current ROCE for Eagle Bulk Shipping 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 Eagle Bulk Shipping.

How Are Returns Trending?

The fact that Eagle Bulk Shipping is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 8.9% which is a sight for sore eyes. Not only that, but the company is utilizing 31% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 14% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From Eagle Bulk Shipping's ROCE

In summary, it's great to see that Eagle Bulk Shipping has managed to break into profitability and is continuing to reinvest in its business. Since the stock has only returned 18% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

One more thing: We've identified 4 warning signs with Eagle Bulk Shipping (at least 1 which is concerning) , and understanding them would certainly be useful.

While Eagle Bulk Shipping 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.
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