Global Ship Lease (NYSE:GSL) Knows How To Allocate Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Global Ship Lease (NYSE:GSL) we really liked what we saw.

What Is 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. To calculate this metric for Global Ship Lease, this is the formula:

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

0.20 = US$374m ÷ (US$2.2b - US$266m) (Based on the trailing twelve months to March 2024).

Thus, Global Ship Lease has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Shipping industry average of 8.4%.

View our latest analysis for Global Ship Lease

In the above chart we have measured Global Ship Lease'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 Global Ship Lease for free.

What Does the ROCE Trend For Global Ship Lease Tell Us?

Investors would be pleased with what's happening at Global Ship Lease. Over the last five years, returns on capital employed have risen substantially to 20%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 69%. So we're very much inspired by what we're seeing at Global Ship Lease thanks to its ability to profitably reinvest capital.

What We Can Learn From Global Ship Lease's ROCE

All in all, it's terrific to see that Global Ship Lease is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 299% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Global Ship Lease does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

Global Ship Lease 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.

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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.

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