Returns on Capital Paint A Bright Future For Genco Shipping & Trading (NYSE:GNK)
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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Genco Shipping & Trading's (NYSE:GNK) look very promising so lets take a look.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Genco Shipping & Trading, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$244m ÷ (US$1.2b - US$49m) (Based on the trailing twelve months to June 2022).
Thus, Genco Shipping & Trading has an ROCE of 21%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar industry.
Check out our latest analysis for Genco Shipping & Trading
Above you can see how the current ROCE for Genco Shipping & Trading compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Genco Shipping & Trading.
What Can We Tell From Genco Shipping & Trading's ROCE Trend?
Like most people, we're pleased that Genco Shipping & Trading is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 25%. This could potentially mean that the company is selling some of its assets.
The Bottom Line
In the end, Genco Shipping & Trading has proven it's capital allocation skills are good with those higher returns from less amount of capital. Considering the stock has delivered 32% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Genco Shipping & Trading does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.
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