Returns On Capital Are Showing Encouraging Signs At Star Bulk Carriers (NASDAQ:SBLK)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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 Star Bulk Carriers (NASDAQ:SBLK) and its trend of ROCE, we really liked what we saw.

What Is 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. To calculate this metric for Star Bulk Carriers, this is the formula:

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

0.074 = US$196m ÷ (US$3.0b - US$359m) (Based on the trailing twelve months to December 2023).

So, Star Bulk Carriers has an ROCE of 7.4%. On its own, that's a low figure but it's around the 7.7% average generated by the Shipping industry.

Check out our latest analysis for Star Bulk Carriers

In the above chart we have measured Star Bulk Carriers' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Star Bulk Carriers for free.

What Does the ROCE Trend For Star Bulk Carriers Tell Us?

Star Bulk Carriers has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 37% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Our Take On Star Bulk Carriers' ROCE

As discussed above, Star Bulk Carriers appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 369% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Star Bulk Carriers can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Star Bulk Carriers, we've discovered 5 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. 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.