In This Article:
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. So when we looked at First Ship Lease Trust (SGX:D8DU) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for First Ship Lease Trust, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$3.4m ÷ (US$38m - US$3.5m) (Based on the trailing twelve months to June 2024).
Thus, First Ship Lease Trust has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Shipping industry average of 7.2% it's much better.
Check out our latest analysis for First Ship Lease Trust
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how First Ship Lease Trust has performed in the past in other metrics, you can view this free graph of First Ship Lease Trust's past earnings, revenue and cash flow.
So How Is First Ship Lease Trust's ROCE Trending?
You'd find it hard not to be impressed with the ROCE trend at First Ship Lease Trust. The data shows that returns on capital have increased by 94% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 87% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
What We Can Learn From First Ship Lease Trust's ROCE
In a nutshell, we're pleased to see that First Ship Lease Trust has been able to generate higher returns from less capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.