Can Performance Shipping (NASDAQ:PSHG) Continue To Grow Its Returns On Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So when we looked at Performance Shipping (NASDAQ:PSHG) and its trend of ROCE, we really liked what we saw.

What is 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. The formula for this calculation on Performance Shipping is:

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

0.067 = US$9.9m ÷ (US$155m - US$8.1m) (Based on the trailing twelve months to September 2020).

Thus, Performance Shipping has an ROCE of 6.7%. In absolute terms, that's a low return but it's around the Shipping industry average of 6.1%.

Check out our latest analysis for Performance Shipping

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Performance Shipping, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

You'd find it hard not to be impressed with the ROCE trend at Performance Shipping. We found that the returns on capital employed over the last five years have risen by 278%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Performance Shipping appears to been achieving more with less, since the business is using 65% less capital to run its operation. Performance Shipping may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Key Takeaway

In summary, it's great to see that Performance Shipping has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has dived 100% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

Like most companies, Performance Shipping does come with some risks, and we've found 3 warning signs that you should be aware of.

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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