Golden Ocean Group's (NASDAQ:GOGL) Returns Have Hit A Wall

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Golden Ocean Group (NASDAQ:GOGL), it didn't seem to tick all of these boxes.

Understanding 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. The formula for this calculation on Golden Ocean Group is:

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

0.054 = US$178m ÷ (US$3.5b - US$261m) (Based on the trailing twelve months to September 2023).

Thus, Golden Ocean Group has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Shipping industry average of 8.7%.

View our latest analysis for Golden Ocean Group

Above you can see how the current ROCE for Golden Ocean Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Golden Ocean Group for free.

So How Is Golden Ocean Group's ROCE Trending?

There are better returns on capital out there than what we're seeing at Golden Ocean Group. The company has employed 23% more capital in the last five years, and the returns on that capital have remained stable at 5.4%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

In summary, Golden Ocean Group has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 256% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Golden Ocean Group does have some risks though, and we've spotted 3 warning signs for Golden Ocean Group that you might be interested in.

While Golden Ocean Group 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. 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.