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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating First Ship Lease Trust (SGX:D8DU), we don't think it's current trends fit the mold of a multi-bagger.
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. Analysts use this formula to calculate it for First Ship Lease Trust:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = US$3.5m ÷ (US$43m - US$3.5m) (Based on the trailing twelve months to December 2024).
Thus, First Ship Lease Trust has an ROCE of 9.0%. On its own, that's a low figure but it's around the 8.4% average generated by the Shipping industry.
View 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of First Ship Lease Trust.
What Can We Tell From First Ship Lease Trust's ROCE Trend?
We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 83% in that same period. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. In addition to that, since the ROCE doesn't scream "quality" at 9.0%, it's hard to get excited about these developments.
In Conclusion...
In summary, First Ship Lease Trust isn't reinvesting funds back into the business and returns aren't growing. Yet to long term shareholders the stock has gifted them an incredible 422% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
One more thing, we've spotted 2 warning signs facing First Ship Lease Trust that you might find interesting.