Returns On Capital Are Showing Encouraging Signs At Pyxis Tankers (NASDAQ:PXS)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Pyxis Tankers (NASDAQ:PXS) and its trend of ROCE, we really liked what we saw.

Understanding 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 Pyxis Tankers is:

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

0.062 = US$7.5m ÷ (US$138m - US$17m) (Based on the trailing twelve months to September 2022).

Therefore, Pyxis Tankers has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Shipping industry average of 18%.

Our analysis indicates that PXS is potentially overvalued!

Above you can see how the current ROCE for Pyxis Tankers 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 Pyxis Tankers.

The Trend Of ROCE

Shareholders will be relieved that Pyxis Tankers has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 6.2% on its capital. While returns have increased, the amount of capital employed by Pyxis Tankers has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

What We Can Learn From Pyxis Tankers' ROCE

In summary, we're delighted to see that Pyxis Tankers has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 48% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Pyxis Tankers does have some risks, we noticed 4 warning signs (and 1 which is concerning) we think you should know about.

While Pyxis Tankers isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.