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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Ardmore Shipping (NYSE:ASC), it didn't seem to tick all of these boxes.
What is 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. To calculate this metric for Ardmore Shipping, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = US$36m ÷ (US$762m - US$55m) (Based on the trailing twelve months to September 2020).
Thus, Ardmore Shipping has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 9.0%.
Above you can see how the current ROCE for Ardmore Shipping compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ardmore Shipping here for free.
What The Trend Of ROCE Can Tell Us
Over the past five years, Ardmore Shipping's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Ardmore Shipping doesn't end up being a multi-bagger in a few years time.
What We Can Learn From Ardmore Shipping's ROCE
In summary, Ardmore Shipping isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 52% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Ardmore Shipping has the makings of a multi-bagger.
One more thing, we've spotted 1 warning sign facing Ardmore Shipping that you might find interesting.
While Ardmore Shipping isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. 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.
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