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What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So when we looked at Global Ship Lease (NYSE:GSL) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on Global Ship Lease is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$381m ÷ (US$2.2b - US$256m) (Based on the trailing twelve months to September 2024).
So, Global Ship Lease has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Shipping industry average of 10% it's much better.
See 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Global Ship Lease .
What Does the ROCE Trend For Global Ship Lease Tell Us?
Global Ship Lease is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 19%. The amount of capital employed has increased too, by 75%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Key Takeaway
To sum it up, Global Ship Lease has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One more thing: We've identified 2 warning signs with Global Ship Lease (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.
While Global Ship Lease isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.