Returns Are Gaining Momentum At Overseas Shipholding Group (NYSE:OSG)
If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. So on that note, Overseas Shipholding Group (NYSE:OSG) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Overseas Shipholding Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = US$81m ÷ (US$1.1b - US$150m) (Based on the trailing twelve months to March 2023).
Therefore, Overseas Shipholding Group has an ROCE of 8.2%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 23%.
Check out our latest analysis for Overseas Shipholding Group
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Overseas Shipholding Group's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Overseas Shipholding Group Tell Us?
Overseas Shipholding Group is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 64% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
Our Take On Overseas Shipholding Group's ROCE
In summary, we're delighted to see that Overseas Shipholding Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Considering the stock has delivered 9.2% 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.
Overseas Shipholding Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...
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.
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