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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Star Bulk Carriers (NASDAQ:SBLK) we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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. 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)
0.28 = US$946m ÷ (US$3.6b - US$305m) (Based on the trailing twelve months to June 2022).
Thus, Star Bulk Carriers has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Shipping industry average of 19%.
Our analysis indicates that SBLK is potentially undervalued!
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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Star Bulk Carriers Tell Us?
The fact that Star Bulk Carriers 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 28% on its capital. In addition to that, Star Bulk Carriers is employing 59% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
What We Can Learn From Star Bulk Carriers' ROCE
To the delight of most shareholders, Star Bulk Carriers has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
Star Bulk Carriers does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.
Star Bulk Carriers is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
What are the risks and opportunities for Star Bulk Carriers?
Trading at 39.5% below our estimate of its fair value
Earnings have grown 78.6% per year over the past 5 years
Earnings are forecast to decline by an average of 17.4% per year for the next 3 years
Has a high level of debt
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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.