If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. 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 on that note, Genco Shipping & Trading (NYSE:GNK) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
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 Genco Shipping & Trading, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$196m ÷ (US$1.2b - US$42m) (Based on the trailing twelve months to December 2021).
Therefore, Genco Shipping & Trading has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Shipping industry average of 15%.
In the above chart we have measured Genco Shipping & Trading's 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 Genco Shipping & Trading here for free.
The Trend Of ROCE
It's great to see that Genco Shipping & Trading has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 17% which is no doubt a relief for some early shareholders. In regards to capital employed, Genco Shipping & Trading is using 25% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Genco Shipping & Trading could be selling under-performing assets since the ROCE is improving.
The Bottom Line
From what we've seen above, Genco Shipping & Trading has managed to increase it's returns on capital all the while reducing it's capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 93% return over the last five years. In light of that, we think it's worth looking further into this stock because if Genco Shipping & Trading can keep these trends up, it could have a bright future ahead.
One more thing, we've spotted 3 warning signs facing Genco Shipping & Trading that you might find interesting.
While Genco Shipping & Trading isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
What are the risks and opportunities for Genco Shipping & Trading?
Trading at 73.7% below our estimate of its fair value
Earnings are forecast to grow 7.63% per year
Profit margins (18.7%) are lower than last year (38.7%)
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.