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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at First Ship Lease Trust (SGX:D8DU) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
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)
0.056 = US$3.5m ÷ (US$66m - US$4.3m) (Based on the trailing twelve months to December 2023).
Thus, First Ship Lease Trust has an ROCE of 5.6%. In absolute terms, that's a low return but it's around the Shipping industry average of 6.9%.
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're interested in investigating First Ship Lease Trust's past further, check out this free graph covering First Ship Lease Trust's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
First Ship Lease Trust has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 43%. 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 74% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
The Key Takeaway
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. Therefore, we think it would be worth your time to check if these trends are going to continue.