What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Eagle Bulk Shipping is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = US$19m ÷ (US$1.0b - US$92m) (Based on the trailing twelve months to March 2021).
Therefore, Eagle Bulk Shipping has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Shipping industry average of 6.2%.
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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
The fact that Eagle Bulk Shipping is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 2.1% on its capital. In addition to that, Eagle Bulk Shipping is employing 26% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Bottom Line
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. And since the stock has fallen 34% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
Eagle Bulk Shipping does have some risks though, and we've spotted 2 warning signs for Eagle Bulk Shipping that you might be interested in.
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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