Eneti (NYSE:NETI) Shareholders Will Want The ROCE Trajectory To Continue

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Eneti's (NYSE:NETI) returns on capital, so let's have a look.

Understanding 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. Analysts use this formula to calculate it for Eneti:

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

0.09 = US$69m ÷ (US$801m - US$43m) (Based on the trailing twelve months to September 2022).

So, Eneti has an ROCE of 9.0%. In absolute terms, that's a low return and it also under-performs the Shipping industry average of 19%.

Check out the opportunities and risks within the US Shipping industry.

In the above chart we have measured Eneti'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 Eneti here for free.

What Does the ROCE Trend For Eneti Tell Us?

Like most people, we're pleased that Eneti is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 9.0% on their capital employed. In regards to capital employed, Eneti is using 46% 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. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

What We Can Learn From Eneti's ROCE

From what we've seen above, Eneti has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has dived 85% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

On a final note, we found 2 warning signs for Eneti (1 is concerning) 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.