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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Danaos' (NYSE:DAC) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Danaos, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$612m ÷ (US$3.5b - US$185m) (Based on the trailing twelve months to June 2023).
Thus, Danaos has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Shipping industry.
View our latest analysis for Danaos
In the above chart we have measured Danaos' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Danaos.
The Trend Of ROCE
Danaos' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 165% 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line On Danaos' ROCE
To sum it up, Danaos is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Danaos can keep these trends up, it could have a bright future ahead.
If you'd like to know more about Danaos, we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.
While Danaos isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
About NYSE:DAC
Danaos
Provides container and drybulk vessels services in Australia, Asia, and Europe.
Undervalued with excellent balance sheet.
