What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Eagle Bulk Shipping (NYSE:EGLE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is 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. To calculate this metric for Eagle Bulk Shipping, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.036 = US$34m ÷ (US$1.2b - US$215m) (Based on the trailing twelve months to September 2023).
So, Eagle Bulk Shipping has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Shipping industry average of 9.0%.
In the above chart we have measured Eagle Bulk Shipping'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 Eagle Bulk Shipping here for free.
What Does the ROCE Trend For Eagle Bulk Shipping Tell Us?
There are better returns on capital out there than what we're seeing at Eagle Bulk Shipping. The company has employed 22% more capital in the last five years, and the returns on that capital have remained stable at 3.6%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 19% of total assets, this reported ROCE would probably be less than3.6% because total capital employed would be higher.The 3.6% ROCE could be even lower if current liabilities weren't 19% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.
The Bottom Line
In summary, Eagle Bulk Shipping has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 82% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Eagle Bulk Shipping does have some risks, we noticed 4 warning signs (and 1 which can't be ignored) we think you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.