Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. With that in mind, we've noticed some promising trends at Scorpio Tankers (NYSE:STNG) so let's look a bit deeper.
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 Scorpio Tankers, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = US$201m ÷ (US$4.6b - US$429m) (Based on the trailing twelve months to June 2022).
Therefore, Scorpio Tankers has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 16%.
In the above chart we have measured Scorpio Tankers' 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 Scorpio Tankers here for free.
What Does the ROCE Trend For Scorpio Tankers Tell Us?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 4.8%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 27%. So we're very much inspired by what we're seeing at Scorpio Tankers thanks to its ability to profitably reinvest capital.
Our Take On Scorpio Tankers' ROCE
In summary, it's great to see that Scorpio Tankers can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 32% to shareholders. So with that in mind, we think the stock deserves further research.
If you want to continue researching Scorpio Tankers, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Scorpio Tankers isn't earning the highest return, check out this free list of companies that are 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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