Return Trends At Genco Shipping & Trading (NYSE:GNK) Aren't Appealing
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Genco Shipping & Trading (NYSE:GNK), it didn't seem to tick all of these boxes.
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 Genco Shipping & Trading:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = US$36m ÷ (US$1.1b - US$35m) (Based on the trailing twelve months to December 2023).
Thus, Genco Shipping & Trading has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Shipping industry average of 8.2%.
View our latest analysis for Genco Shipping & Trading
In the above chart we have measured Genco Shipping & Trading'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 Genco Shipping & Trading for free.
So How Is Genco Shipping & Trading's ROCE Trending?
We're a bit concerned with the trends, because the business is applying 27% less capital than it was five years ago and returns on that capital have stayed flat. 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. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.
The Bottom Line
It's a shame to see that Genco Shipping & Trading is effectively shrinking in terms of its capital base. Yet to long term shareholders the stock has gifted them an incredible 247% 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.
Like most companies, Genco Shipping & Trading does come with some risks, and we've found 1 warning sign that 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.
