U.S. Markets closed

Is Safe Bulkers, Inc. (NYSE:SB) Investing Effectively In Its Business?

Simply Wall St

Today we'll look at Safe Bulkers, Inc. (NYSE:SB) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Safe Bulkers:

0.051 = US$50m ÷ (US$1.1b - US$77m) (Based on the trailing twelve months to September 2019.)

Therefore, Safe Bulkers has an ROCE of 5.1%.

View our latest analysis for Safe Bulkers

Does Safe Bulkers Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Safe Bulkers's ROCE is around the 4.9% average reported by the Shipping industry. Aside from the industry comparison, Safe Bulkers's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

Safe Bulkers reported an ROCE of 5.1% -- better than 3 years ago, when the company didn't make a profit. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Safe Bulkers's past growth compares to other companies.

NYSE:SB Past Revenue and Net Income, January 10th 2020

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Safe Bulkers.

How Safe Bulkers's Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Safe Bulkers has total assets of US$1.1b and current liabilities of US$77m. As a result, its current liabilities are equal to approximately 7.2% of its total assets. Safe Bulkers has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.

Our Take On Safe Bulkers's ROCE

Safe Bulkers looks like an ok business, but on this analysis it is not at the top of our buy list. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.